23. Juli 2012 
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Investor appetite for property asset class defies downbeat view of economic woes
The commercial property sector’s faith in property as an asset class outweighs its doubts over broader concerns about near-term economic activity, as investors look to increase their exposure to the sector. This is the conclusion of the latest Lloyds Bank Wholesale Banking & Markets Commercial Property Confidence Monitor, produced in association with the Investment Property Forum.
Sentiment surrounding the sector’s prospects is mixed, with rising and falling levels of optimism depending on the size and location of respondents’ companies. But, their investment intentions have firmed noticeably, as investors look to take advantage of lower prices and distressed sales.
Major businesses and fund managers have the greatest appetite for new investment in the next three to six months, with 65 per cent and 58 per cent respectively seeking to increase their exposure to the sector. This is in spite of half (50 per cent) of the fund managers questioned expecting the UK commercial property market to slow down over the same period and only four per cent expecting it to improve.
The double-dip recession in 2012 Q1, ongoing liquidity issues in the lending market and the recent intensification of the Euro zone debt crisis were cited as being among the drivers of negative sentiment in the current survey. This is countered by perceived positive factors including a seasonal upturn, low interest rates, affordable prices and the feel-good effect of the Jubilee celebrations and the forthcoming London 2012 Olympic and Paralympic Games.
Lynda Shillaw, Lloyds Bank Wholesale Banking & Markets’ Managing Director of Corporate Real Estate, said:
“Funds are sending a clear signal that they want to increase their allocation to real estate and this is shared by most respondents. Their intention to invest is likely to be linked to perceived long term returns and shifts in their asset allocation strategies and the real estate funding market. While there is clearly pessimism surrounding immediate prospects for market activity, portfolio performance and in some cases property valuations, investors are nevertheless seeing the opportunity for longer term value growth when buying at today’s prices. To take advantage of this pricing against a backdrop of generally constrained lending, investors need to work with their banks to tap into wider sources of investment funding from the debt capital markets.”
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 increased most among major businesses (up 13 points to +29) and businesses in London (up 9 points to +18). This was in sharp contrast to fund managers, the most pessimistic group overall with a net balance of -17.
Property values remain muted and whilst there is a broader market expectation for further falls in value medium to large businesses in London and major organisations expect a net increase in the coming period. Conversely, investment appetite among London firms fell sharply. Only 30 per cent are looking to increase their exposure to property in the coming two quarters, while 13 per cent seek to divest.
Lynda Shillaw said:
“Central London remains the sweet spot for real estate, as evidenced by the recent results from companies like Shaftesbury and Great Portland Estates who have good quality stock in great central locations. There is also good momentum in prime West End retail. But, some investors will be priced out of London and may turn to prime regional assets offering better value. We are already seeing some of the large REITs selectively acquiring non-London prime.This quarter’s survey also asked respondents about their appetite for the hotel & leisure and healthcare sectors.
Most groups expected to increase their exposure to the hotel & leisure sector, with the exception of major businesses. London-based companies have the highest allocation to the sector, at around seven per cent, and expect to increase this to nine per cent by the end of 2012.”
Sentiment surrounding the sector’s prospects is mixed, with rising and falling levels of optimism depending on the size and location of respondents’ companies. But, their investment intentions have firmed noticeably, as investors look to take advantage of lower prices and distressed sales.
Major businesses and fund managers have the greatest appetite for new investment in the next three to six months, with 65 per cent and 58 per cent respectively seeking to increase their exposure to the sector. This is in spite of half (50 per cent) of the fund managers questioned expecting the UK commercial property market to slow down over the same period and only four per cent expecting it to improve.
The double-dip recession in 2012 Q1, ongoing liquidity issues in the lending market and the recent intensification of the Euro zone debt crisis were cited as being among the drivers of negative sentiment in the current survey. This is countered by perceived positive factors including a seasonal upturn, low interest rates, affordable prices and the feel-good effect of the Jubilee celebrations and the forthcoming London 2012 Olympic and Paralympic Games.
Lynda Shillaw, Lloyds Bank Wholesale Banking & Markets’ Managing Director of Corporate Real Estate, said:
“Funds are sending a clear signal that they want to increase their allocation to real estate and this is shared by most respondents. Their intention to invest is likely to be linked to perceived long term returns and shifts in their asset allocation strategies and the real estate funding market. While there is clearly pessimism surrounding immediate prospects for market activity, portfolio performance and in some cases property valuations, investors are nevertheless seeing the opportunity for longer term value growth when buying at today’s prices. To take advantage of this pricing against a backdrop of generally constrained lending, investors need to work with their banks to tap into wider sources of investment funding from the debt capital markets.”
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 increased most among major businesses (up 13 points to +29) and businesses in London (up 9 points to +18). This was in sharp contrast to fund managers, the most pessimistic group overall with a net balance of -17.
Property values remain muted and whilst there is a broader market expectation for further falls in value medium to large businesses in London and major organisations expect a net increase in the coming period. Conversely, investment appetite among London firms fell sharply. Only 30 per cent are looking to increase their exposure to property in the coming two quarters, while 13 per cent seek to divest.
Lynda Shillaw said:
“Central London remains the sweet spot for real estate, as evidenced by the recent results from companies like Shaftesbury and Great Portland Estates who have good quality stock in great central locations. There is also good momentum in prime West End retail. But, some investors will be priced out of London and may turn to prime regional assets offering better value. We are already seeing some of the large REITs selectively acquiring non-London prime.This quarter’s survey also asked respondents about their appetite for the hotel & leisure and healthcare sectors.
Most groups expected to increase their exposure to the hotel & leisure sector, with the exception of major businesses. London-based companies have the highest allocation to the sector, at around seven per cent, and expect to increase this to nine per cent by the end of 2012.”
