Jul 10 - Graham Sanders chairs 7th Annual I P F Conference in Scotland
Property investment back to basic principles?
The seventh annual IPF Property Investment Conference in Scotland, sponsored by SWIP and Miller Developments, took place in Edinburgh on 9 June. The speakers, all leading industry experts, underlined the challenges facing the property industry and economy as a whole in the next 12-24 months and the changes we are likely to see as a result. The event was chaired by IPF Scotland Chairman, Graham Sanders of Sanders Cartwright.
Welcoming everyone to the conference, Malcolm Naish, Director of Property, SWIP said that the last five years had been an extraordinary period. In his view, some of the greatest challenges are yet to come.
John Gellatly, Head of Europe Real Estate Multi-Manager, Aviva Investors and the IPFs incoming National Chairman, agreed with Malcolm and said he thought the investment outlook generally was not hugely positive, it is going to be really bad, or not so bad. While theoretically there is some growth in the economy and we have historically low interest rates, the situation in Greece has led to considerable downgrading of expectations. He was concerned about what was going to happen when quantitative easing finished and rising unemployment figures once the public sector cuts took effect.
The UK has a mature and liquid property market, which is why it attracts so much overseas investment. However, the market was likely to get tougher for a number of reasons, not least because the German open-ended funds will be subject to more stringent liquidity regulations and so are unlikely to be such large investors in direct property going forward. Coupled with this, we are going to see rising bond rates, and potentially interest rates and an increasing level of regulations, through Basle 11, the AIFM Directive etc. However, compared with equivalent gilts, he thought property would look reasonably attractive, especially if one thinks there is an inflationary risk.
In terms of specific property sectors, the Aviva funds favoured shopping centres and retail warehousing over standard retail, which was fraught with difficulty. John thought that Central London offices were a three-year play, with the market turning down in 2012 but he liked the high cashflow yields from industrial.
Lucy O'Carroll, Senior Economist, Lloyds Banking Group, said the global economy was returning to growth, the UK having experienced a period of severe recession. However, there were some significant uncertainties, including the timing, scale and impact of deleveraging by businesses and households, and the effects of the government's fiscal squeeze.
Lloyds Banking Group's base scenario for the UK economy envisages a return to growth this year, followed by a fairly anaemic period of expansion out to 2014 as the potential for a stronger post-recession rebound is offset by deleveraging and fiscal tightening. Given the uncertainties, however, there is a significant risk of a double-dip. Press Release One of the problems she foresaw was that, "almost all countries are trying to export their way out of recession at present - but if we all try to do that, the only way we can all succeed is by exporting to Mars."
With regard to property, there was evidence of polarisation in the market, with a stronger recovery in London, for prime property and for major businesses/fund managers. On the basis that confidence spreads more widely through the market, capital values can be expected to continue increasing at a modest pace out to 2014, following this year's recovery. However, "a sustained performance from the property market depends on continued recovery in the wider economy.
The outlook for the market is also very dependent on the prospects of the banks lending again. Max Sinclair, Head of UK Division, Eurohypo said he thought that 2009 should prove to be the low point for new property debt origination but the situation was still difficult. There is a funding gap of at least 40-45bn in the property market and the problem is compounded by the £50bn of debt, according to the De Montford survey, due for refinancing in 2010, with further large sums in 2011 and 2013.
So what is going to happen? 2010 is likely to prove very slow, with liquidity in the banking market declining, 60%-65% loan to value remaining the norm, loans over £100m being in a rarefied atmosphere, and bankers being very reluctant to lend on anything that is not prime property. Interest rates are likely to stay low over the long term but for the markets to free up, there needs to be a reduction in pricing in most stock providing buying opportunities into 2011.
The supply of debt for the property market will however remain constrained until the banks are recapitalised, as they cannot take the losses from selling property until then.
Andrew Smith, Global Head of Property, Aberdeen Asset Management described the last 10 years as a lost decade for property investors as capital values in nominal terms were back to those at the beginning of 2000 and in real terms they were negative. However, institutional and retail investor demand has rebounded rapidly as UK property looks attractive compared to both other property markets and other asset classes. Overseas investors are particularly enamoured with the large shiny offices in Central London, accounting for over three-quarters of investment in this sector.
He said the retail sector particularly was still finding the market tough. Some retailers, not least Woolworths, have disappeared and those remaining are experiencing increased competition from internet sales, out of town centres and the supermarkets taking a larger share of the non-food sector.
Like Aviva Investors, Aberdeen thinks the property market will remain relatively attractive compared with the equity and bond markets.
The debt crisis has changed investor behaviour: there is less appetite for risk, investors want greater control and a greater alignment in interests between the investors and fund managers. He thought the greater risk aversion was likely to be temporary but other changes would be long lasting.
The final speaker, Ian Watson, Joint Chief Executive, Hansteen Holdings, considered the legacy of the credit crunch and the need for countries, banks and individuals to de-gear. He thought that we could be in for, a long period of grisly, grinding difficult times, with the next couple of years feeling more like a recession to most of the UK than during 2008-09, particularly as the fiscal stimulus will be reversed at some time.
There will be no rental growth for quite a period so property yields are likely to move out. Nothing will be settled until investors decide what IRR they can live with in Ians view, a total return of 8%-12% ought to be achievable if one buys sensibly. He sees this market as an opportunity for property professionals who understand property and tenants and can buy at forced sale values and/or where there are high vacancy rates.
Graham Sanders, Chairman, expressed the view that the position on rents and rental values was understated by the market, particularly in the retail and office sectors. With the growth of online shopping and the substantial incentives required to achieve lettings, this will be the main factor contributing to a drift in capital values in the next 6 12 months.
The key message from the Conference is that returns from property over the next few years are likely to be relatively attractive compared with equities and gilts. However, these returns will not come easily and careful sector selection and active asset management will be essential pre-requisites in achieving them.
ENDS
Notes to Editors
IPF Profile
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Undertaking research and special projects;
Providing education; and
Encouraging discussion & debate.
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