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Real estate fund

Property chiefs split on the shape of recovery


Leading experts in the commercial property sector have predicted a cautious year for listed real estate which will see the office market recover far more strongly than industrial, retail and residential property.

The latest Expert Panel survey commissioned by Reita, the online portal for real estate investment trusts, shows that less than five per cent of respondents think the remarkable recovery in asset values will continue strongly during 2010.
The UK Investment Property Databank index shows that commercial property values have, on average, risen by over nine per cent since July 2009. However, while they are still 40 per cent below their 2007 peak, their equivalent yield of 8.3 per cent compares favourably to a ten year gilt yield of 4.0 per cent.
However, different parts of the market are moving at different speeds, and there remains concern that the wider market – particularly secondary stock not included as part of IPD universe – could take another year to 18 months to catch up with Mayfair and the City.

As between different sub-sectors, the Expert Panel remains most optimistic about offices, with 48 per cent expecting it to recover faster than retail, industrial and residential over the next 12 months.
The FTSE UK Property Index, which tracks quoted property stocks, is up 93 per cent from its low March 2009, but still 65 per cent below its peak at the start of 2007 and 30 per cent below its level of September 2008, before the fall of Lehman Brothers.

Forty-eight per cent of the Expert Panel now expect returns for Reits to be slightly worse than direct property over the next 12 months – up from 21 per cent last September.
Expectations about how rental values will perform have improved, with 43 per cent expecting them to recover more quickly than they did following the 1992 recession, up from 29 per cent in the last survey.
Reflecting the burgeoning interest among retail investors, 95 per cent of respondents agree that sentiment towards property has improved during the last quarter, but concern remains over how long secondary property will take to recover. Fifty-seven per cent of the Expert Panel do not expect to see a contraction in secondary yields before 2011, up from 29 per cent in the last survey.
With shop vacancies standing at around one in ten, and with secondary areas in the regions particularly badly hit across all sectors, many see the persistent uncertainty about the pace of business recovery and increased occupancy continuing to overshadow the upturn.
Peter Cosmetatos, director of Reita, says: “The most telling conclusion here is the lack of consensus from the panel over how quickly and to what extent the wider market may recover. The only economic certainty is that public spending will be severely cut by the next government and that people will have a lot less money to spend as a result. This will undoubtedly have an impact on business and on the take-up of commercial space. With that in mind we should tread very carefully when making any predictions over long term market recovery this year.”
For the second quarter running, the expert panel was split pretty equally as to whether residential property will increase or decrease in value over the next year.

Dave Butler, director of corporate affairs at Grainger, says: “Although recent indicators point to stabilisation in the market, it is ultimately the supply and demand imbalance that is propping up house prices and it would be short-sighted to assume we are out of the woods yet.
“In such an environment the only prediction that can be made with confidence is that 2010 will be a year of uncertainty. Ultimately it is financing that will the crucial factor, at present we are still seeing significant restrictions in mortgage finance, which have thwarted willing buyers hoping to snap up a bargain.”

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