Warming of the property climate looks set to last beyond summer


writes Jane Roberts

Jane Roberts, editorReal Estate Capital signed off the July/August issue with a bullish leader and rather a lot of seasonal puns about the sunnier outlook for the UK economy and the clouds parting at long last over the property market.

If anything, as people have returned from holidays, the mood of confidence is even stronger.

One new development in the past few weeks is that the improving sentiment is spreading to parts of continental European property markets too.

The turnaround in the tone of punditry on the UK economy is striking. That a recovery is under way now seems to be a given: the days of trying to work out what quantitative easing is (and how to spell it) are long gone: instead of cutting interest rates and injecting liquidity, the discussion now is all about growth.

We seem to have jumped from asking whether the little growth we’ve actually seen so far is
sustainable, to how to manage it so that interest rates do not have to rise too far, too fast.

In the UK property market a perception has taken hold that values have stopped falling on enough property (though not all) to say that we are at the beginning of a new cycle and that the next two years are going to be a good time to invest.

The flood of new capital led by private equity funds that came to this conclusion months ago has been joined by more naturally cautious institutional investors.

At its annual property press briefing last week, Standard Life said that it has been having “more conversations” across its funds with existing investors and consultants all wanting to “move up a step” in terms of allocations. They felt that real estate was reacting very fast this time to the gently improving economy, because property didn’t enter the downturn with excess supply.

Standard Life predicts that UK property will produce 8% total returns on average during the next three years. Last Friday, Legal & General Property declared for 8-10% returns this year and said there was “a surge” in investor sentiment towards UK property.

In the UK and Germany (see Special report, pp15-17, 18-19, 20, 21, 22-23 & 24) there is no shortage of debt to fuel transactions, while a still-growing number of new lenders (see news section pp2-5 & 7) are ready to lend on a wider pool of assets, increasing the financial options available to investors.

However, as LGP also said, we are still living with the effects of the global financial crisis.

Arguably, Standard Life is wrong about there being no excess supply. There is, and it lies with the banks, which most people seem to agree still have a considerable way to go through their develeraging process: they still have lot of that property that hasn’t been ‘repriced’ on their books.

At least the market is now moving in their favour and, as Cushman & Wakefield predicted months ago, the final quarter of this year is set to be a record period for European bank loan and asset sales, both in the UK and elsewhere, including Spain
(p3, p13).