Money into property 1998

Citation

(1999), "Money into property 1998", Property Management, Vol. 17 No. 1. https://doi.org/10.1108/pm.1999.11317aab.011

Money into property 1998

Money into property 1998

Keywords Property investment, United Kingdom

"Despite a rise in investment activity and an increase in loans to the UK commercial property market, there are no significant signs of destabilisation occurring through excessive liquidity. Even with some slowing in economic growth there is no reason why the market should not continue to provide sound investment opportunities if investors and lenders do not over-estimate the fundamentals of occupier demand", according to international property advisers DTZ Debenham Thorpe, who in September published the 23rd edition of its annual Money into Property report.

Money into Property 1998 examines the main flows of equity and debt into the sector and is underpinned by two major surveys, one covering institutional property fund managers and the other lenders.

Peter Evans, Research Director, comments:

Although the economy is undoubtedly slowing and this will impact upon occupier demand, the paucity of development in many markets should ensure the supply/demand balance, particularly for prime space, remains in the investor's favour. However, investors and lenders alike need to pay close attention to the dynamics of the market and the extent to which the yields they are willing to pay or the loan terms they offer fully reflect realistic forecasts of future performance.

Increased support for commercial property amongst institutional investorsOverall, the recent level of institutional investment activity is, in real terms, the second highest recorded, with total turnover (gross purchases and sales) running at nearly £15.5 billion. DTZ's 1998 Fund Manager's Survey indicates that institutional net investment into commercial property could reach £2.3 billion during this year. The typical property fund manager expects property to outperform both equities and bonds this year, with estimated returns of around 15 per cent for direct property investment.

Increased activity in the pre-letting market coupled with caution surrounding future economic growth and hence occupier demand, has reduced interest in purely speculative schemes with a large proportion of future development capital targeted at pre-let projects. This will assist in sustaining a stable market in any future downturn.

Lenders willing to expand loans to commercial property sector in the short termThe latest Bank of England statistics show a marked increase in bank exposure to the commercial property sector, reversing the steady decline in net debt outstanding to property companies seen for much of the period since 1991. This trend looks likely to continue over the next year with just under half of the respondents in DTZ's survey saying that they would expand loan books over the short term.

In addition to the £36.4 billion recorded by the Bank of England (End of Q2 1998), there is approximately £14.5 billion of debt finance not identified by the Bank of England figures. DTZ estimate total lending in the sector to be in theorder of £51 billion.

Investor interest in quoted property company sector declinesOver the course of 1998 to date, investors have shown increasing pessimism towards the sector and the Property Company Share Index now trades at a discount to net asset value.

Net capital issues by commercial property companies totalled £1.35 billion with the first half of 1998 seeing £1.1 million raised, significantly higher than in the same periods in 1996 and 1997. The recent decline in investor appetite for property company stock may affect the capital-raising strategies of many quoted companies.

Over the year, there has been an increase in joint venture activity within the sector and in addition to attracting institutional investors, there has been increasing interest from corporates wishing to form joint ventures with property companies.

Overseas investment continues to boost UK commercial propertyThe UK's underlying property fundamentals relative to its European counterparts, coupled with the expectation of continued rental and capital growth, should prove sufficiently attractive to maintain levels of net investment from overseas well above the five-year average. This should ensure that total direct overseas investment in the UK commercial property market exceeds £3 billion this year.

In addition to the growth in importance of American investors within the indirect property market there has been a particularly strong increase in the amount of capital flowing from the USA into direct commercial property investments. Over the first six months of 1998, it accounted for around one-third of all foreign deals by value.

Despite an anticipated reduction in economic growth and, subject to no further increases in Stamp Duty, the UK should continue to be a key destination for international investors, with a high level of purchasing power remaining a key element of the market.

Mike Cutteridge, Director of National Investment Agency: "Whilst this year's Money into Property reflects the healthy market conditions we have seen over the last 18 months, the current volatility in global political and economic environments will undoubtedly breed caution amongst both property investors and lenders in the short term. Nevertheless, the strength of property fundamentals within the UK, coupled with its relative stability as an asset class compared to equities, should ensure it maintains its appeal".