UK Property Market Commentary - March 2014
2014 has started where 2013 left off, with strong economic data giving rise to renewed optimism about the UK economy. Employment numbers continue to strengthen, business surveys remain positive and a resurgent housing market is boosting consumer confidence.
15 April 2014
2014 has started where 2013 left off, with strong economic data giving rise to renewed optimism about the UK economy. Employment numbers continue to strengthen, business surveys remain positive and a resurgent housing market is boosting consumer confidence. Furthermore, Consumer Price Inflation (CPI) fell in February to 1.7% (source: ONS) in response to weaker growth in emerging markets and the strengthening of sterling versus the dollar, easing the burden on household expenditure.
The Chancellor announced a huge shake-up to the pension industry in the 2014 budget, allowing retirees to choose how to invest their pension savings instead of being forced into an annuity. In the longer term we think this will boost allocations to income-producing ‘real assets,’ such as property. There were also welcome measures to boost household incomes, including tax allowance increases, although a perceived lack of progress on business rates legislation proved frustrating to those in the property industry.
‘Knowledge economies’, particularly technology, media and telecommunications (TMT) is becoming an increasingly important source of occupier demand across a number of markets. The fastest growth has been recorded by broadcasting and computer programming businesses, with the latter accounting for 383,000 jobs outside of London (source: ONS). These companies are choosing to take space in larger and more vibrant regional cities in order to attract and retain staff, leading to improved take-up in markets such as Manchester, Brighton and Reading.
An absence of bank lending and greater risk aversion has stymied new development since the global financial crisis, although this has left a number of markets looking increasingly supply constrained. This shortage is particularly acute in multi-let industrials, where vacancy levels are falling sharply and putting upward pressure on rental values.
We are now seeing a far greater depth to the investment market. One discernable trend in the early stages of the recovery was a narrow focus towards core income producing assets with long leases. Over the last six months this trend has reversed, with a notable strengthening in demand for higher-yielding assets outside of these core markets. This is starting to be reflected in valuations, with CBRE reporting that the prime/secondary yield gap narrowed from 5.9% to 5.6% between September 2013 and March 2014.
The return of re-capitalised banks and the emergence of a number of new lenders, particularly insurers, has led to a notable increase in the availability of bank debt. Anecdotally, we are seeing a narrowing of lending margins across a wide range of property assets, whilst the maximum loan size, relative to valuations are starting to rise. Whilst it is encouraging to see a return to a more orderly market, this does not look like a return to the boom conditions of 2005-7, with many property investors still actively reducing leverage.
Assuming the UK economy continues to grow, we expect returns of 8-10% pa over the next three years, based upon income returns of 5-6% and rising rents across commercial property sectors. The risks in the short-term are now firmly skewed to the upside and given the momentum in the investment market there is a possibility that we may see yields fall more than originally forecast in 2014 and 2015. Whilst this would boost performance in the short-term, returns could be more moderate from 2016. London is expected to continue to record the strongest rental growth in 2014, although we believe higher yielding assets in the regions are well positioned to deliver strong returns over the next three to five years.
The views and opinions contained herein are those of Schroder Property Investment Management Limited and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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Important Information: The views and opinions contained herein are those of Schroders’ Investment team, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. UK: Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA, is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Further information about Schroders can be found at www.schroders.com US: Schroder Investment Management North America Inc. is an indirect wholly owned subsidiary of Schroders plc, a SEC registered investment adviser and is registered in Canada in the capacity of Portfolio Manager with the Securities Commission in Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan providing asset management products and services to clients in Canada. 875 Third Avenue, New York, NY, 10022, (212) 641-3800. www.schroders.com/us