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Business investors still keen on UK commercial property market despite eurozone woes

23-10-2012

 



Despite this fall in confidence, all groups remain committed to investing in the sector and are keen to source opportunities that can add long term value and this might be symptomatic of a perception that the market is near the bottom, the latest Commercial Property Confidence Monitor produced by Lloyds Bank Wholesale Banking and Markets and in association with the Investment Property Forum.

Major businesses and London based medium to large businesses have the greatest appetite for new investment in the sector over the coming three to six months. Major businesses have become more positive, in line with August 2011 expectations, with 70% of respondents aiming to increase commitment and 10% looking to divest.

It also shows that London based medium to large businesses are looking to take advantage of attractive valuations with 4% expecting to invest and just 4% planning to divest.

‘Businesses within the commercial real estate space will be deploying their capital selectively as they manage their portfolios during a period of very little growth within the economy. Despite the pessimism there is a clear appetite for investment into the sector driven by major businesses and London based companies,’ said Lynda Shillaw, Lloyds Bank Wholesale Banking and Markets’ managing director of corporate real estate.

‘This appetite is most likely fuelled by investors’ views of long term growth when buying at today’s prices. In particular we’ve seen larger property companies divesting of assets over the past couple of years and reinvesting into both development schemes and assets with enhancement opportunities, ensuring a healthy pipeline and driving returns. We expect this to continue over the coming quarters,’ she explained.

According to the survey’s composite index, which averages the net balance scores on prospects for the sector in the next three to six months, optimism fell back for all groups with the exception of small businesses where it is unchanged. This broad decline of the index reflects a general softening of all the underlying components with the exception of anticipated portfolio returns where expectations of performance pick up a little for small and medium to large businesses.

Despite the downbeat outlook, small, medium to large and major businesses expect to see a net increase in the performance of their portfolios over the coming three to six months. Small businesses are notably more positive this survey with 25% of respondents anticipating an improvement compared to 8% in May of this year.

Medium to large businesses based in London show the sharpest increase with 46% expecting an improvement, up from 31% in the previous survey, giving their highest net balance since November 2011.

Major businesses and fund managers paint a less positive picture, with the number of fund managers expecting a deterioration outnumbering those who expect an improvement. Major businesses remain more positive than negative, although this group has seen a fall in confidence since the May 2012 survey.

In contrast to the broad expectation that portfolio returns will grow over the next three to six months, most groups mainly expect values to remain static or deteriorate during the next quarter. Some 64% of fund managers are expecting deteriorating values and 30% of major businesses do so, the largest downward shifts compared to the previous survey.

Some 64% of small businesses and 63% of medium to large businesses believe that values will stay at current levels despite expecting an improvement in their portfolio performance. This could suggest a proactive approach, with businesses working within the confines of a difficult market to identify steps to reduce costs or increase rental yields to combat falling values.

‘The confidence trends for portfolio performance suggest that investors are expecting any pick up in returns to be driven by factors other than increasing capital values. This means that effective asset management and enhancement will be the critical drivers of portfolio performance in the short to medium term. With property companies and funds still looking to invest they’ll be looking for those opportunities where value can be added to their portfolio,’ said Shillaw.

Following last quarter’s generally negative shift in expectation regarding the outlook for the UK wide property market, sentiment towards UK activity is set to weaken further for most groups. The majority of respondents have lower expectations of decline in activity in their own business sectors than at a UK market level.

London based medium to large businesses show the most significant difference with 29% expecting a pick up in their own sector compared to 8% for the wider UK property market. By contrast, medium to large businesses in the regions are slightly more positive about the possibility of pick up in the UK market at 17% at 13%.

Looking at sentiment for the UK wide property market on its own, fund managers, who are traditionally thought to lead sentiment by a quarter, are the only group to show an improvement since the previous survey, although they still sit firmly in negative territory. Some 10% of those questioned expect to see a pick up in activity compared to 4% previously. The number expecting a slowdown has also reduced slightly since May, from 50% to 44%.

Economic uncertainty and lack of demand are thought to be the main drivers of negativity, although there are some signs that these factors are leading to a reallocation of investor attention towards non-prime properties.

‘We retain a cautious outlook for the wider UK property market. Despite the fall back in confidence in London-based businesses it still remains a hot spot but overseas money is out pricing the traditional UK investor. With a shortage of appropriate stock on the market we’re seeing more companies look outside of London and the South East to acquire assets where the value add opportunities enable them to be enhanced to prime standards. In spite of the intensification of the euro area debt crisis, the exodus predicted from the region has not materialised as expected, and some respondents see opportunity and are looking to increase, albeit modestly, their exposure,’ added Shillaw.

Medium to large principals, medium to large businesses outside of London and fund managers are anticipating an increase over the next six months. Fund managers see the biggest opportunity for growth and expect to increase their holdings by 0.52%. The proportion of fund managers investing in the euro zone is also set to increase from 50% to 54%.

For the fourth consecutive quarter since its introduction to the survey, residential letting has been identified by most groups as the property sector that is expected to perform the best over the coming three to six months. Fund managers are backing offices whilst major businesses believe that house building will offer the best returns. When questioned about which sector respondents will focus on in the next three to six months, house building comes to the fore for small businesses and major businesses. Fund managers will focus on offices whilst medium to large businesses intend to focus on the residential letting market.

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