Money into Property 1997 - investment bulletin

Citation

(1998), "Money into Property 1997 - investment bulletin", Property Management, Vol. 16 No. 1. https://doi.org/10.1108/pm.1998.11316aab.009

Money into Property 1997 - investment bulletin

Money into Property 1997 ­ investment bulletin

Overview

A strengthening commercial property market, supported by generally improving occupier demand and reducing levels of availability, at least for good quality accommodation, have provided a sound base for increasing flows of money into the sector. There is clear evidence that all of the main sources of investment and lending flows into property are taking a positive view of the sector's performance potential. The net result is a surge in competition and a markedly higher level of liquidity, than has been seen for some time (see Figure 6).

Memories of the late 1980s and the subsequent severe property recession inevitably remain strong with the current rise in liquidity, raising questions as to whether a repeat of that boom/bust cycle is likely. The assessment of 1997's Money into Property, the 22nd annual edition is that anticipated levels of investment and lending over the next couple of years should not destabilise the market. That does presuppose, however, the economy remains sufficiently buoyant to maintain occupier demand and improving property performance does not create an escalation of money flows significantly above those forecast. Nevertheless the property market will remain a cyclical one, so long as investors and lenders in rising market conditions overestimate the fundamentals of occupier demand.

Institutional investment

Encouraging signs of a recovery in institutional support for the commercial property market are provided both by our 1997 Fund Managers Survey and official figures from the Office for National Statistics. Evidence from a third of the largest institutional investors suggests that the latest quarterly net investment total, the highest in three years, is sustainable by both pension funds and insurance companies.

With property fund managers expecting total returns of 12 per cent this year and next there is the potential for net investment in the order of £2.7-3 billion over a two year period. The availability of satisfactory product at appropriate prices is the most likely constraint on this potential outturn.

High gross transactional activity bv institutions, as well as implying a more active approach by fund managers to property as an asset class, also reflects an element of portfolio reorganisation in the light of stronger expected performance within parts of the property market. In a rising market, however, funds may reduce selling activity, wary of being under-invested.

Decreasing availability of income producing quality product has caused institutions to seek other opportunities. There is a growing involvement in development, albeit from a low base.

Institutional demand for indirect property vehicles is growing but is unlikely to translate into significant buying until satisfactory securitised products are created. It is anticipated their eventual appearance will provide a boost for the direct property market.

Property companies: loan finance

While official bank sector statistics report a reduction in debt outstanding to property companies, they mask the underlying positive assessment of the commercial property market that is now taken by the banks.

In addition to the official bank lending numbers there is a substantial amount of borrowing from building societies, insurance companies and banks unauthorised by the Banking Act 1987, as well as an increasing amount of debt securitised by lenders seeking to free up their balance sheets. Our survey, covering a third of all outstanding debt to property companies, indicates that almost three-quarters of lenders now expect to grow their loan books over the next two years.

Increased enthusiasm among lenders has resulted in a willingness to lift their levels of lending, as well as offering more favourable terms to the borrower. Narrower margins, more liberal lending conditions and longer commitment periods, create a more benign climate for borrowers. Although still cautious of speculative development, the DTZ survey of lenders provides evidence of an increasing willingness to support such projects, albeit with fairly demanding criteria.

Property companies: capital issues

The last 18 months have seen a marked improvement in the performance of the quoted property company sector. Strong investor demand in anticipation of improving company results has increased the number of property companies raising capital. With net asset values trading at a premium since the start of the year and renewed confidence in commercial property by the banking sector, property companies have the opportunity to explore a number of routes when seeking finance for expansion.

The improving underlying property market has resulted in players competing for a diminishing number of prime standing investments. With strong tenant demand and reducing availability, there has been a return by property companies to development activity, either self financed or within a joint venture. Rental and capital value growth experienced over the last 18 months, coupled with growing shortages of quality space for occupation, suggest that this activity is both sustainable and desirable.

Overseas investment

The scale of investment in over the last commercial property decade bv overseas investors has illustrated their continued commitment to the UK through the various stages of the property cycle. The growing diversity of property and type, coupled with their considerable liquidity and understanding of property fundamentals has resulted in anticipated record investment at least over the short term.

The potential vagaries of currency movements have clearly not acted as a significant constraint on inward investment activity. The ability for foreign investors to raise debt denominated in Sterling and utilise hedging mechanisms provides them with a high degree of protection from adverse changes.

In addition to the UK's well established, transparent property market, evidence of rental and capital value growth relative to other European countries has increased the foreign investor's appetite for investment within this country. Although London still captures nearly two-thirds of overseas investment, a growing awareness of the diversity of regional opportunities has resulted in an increasing amount of overseas purchasers seeking investments outside the capital.

Investment from Germany dominated overseas purchasing in 1996 but large transactions from investors originating from the Middle East, Far East and The Netherlands this year has seen that country's share reduce. Although the potential for changes in German tax laws could dampen the substantial amounts of money entering open ended funds, and therefore reduce their outward investment, there is no current evidence to suggest reducing commitment to the UK property market.