Investors go colder on property deals
Falling prices, poor rental growth and difficulties raising capital are to blame
Investors in UK property have been in a tight squeeze since values started heading south 12 months ago. Along with falling capital values, they face declines in rental growth and banks pulling even further away from financing property deals.
The consensus among managers in the sector is that total returns from UK commercial property will remain negative until at least 2010.
Investors confirm that demand for property has disappeared. Even German open-ended funds, which have figured as cheap buyers this year, have pulled away following the near collapse of Hypo Real Estate Group.
David Skinner, head of property research at Aviva Investors Real Estate, said: “Lenders’ risk aversion is still rising. There’s a likelihood of further retrenchment among property developers and we see further risk aversion. We think it is going to be a fairly challenging time for property over the course of next year.”
A year ago, monthly total returns from UK commercial property turned negative for the first time since 1992, following falls in capital values.
Investors say the compression of yields between prime and secondary property, and between property and bonds, is to blame for the damage. At one point, they say, the yield premium for property over bonds shrank to zero before moving apart with a vengeance in 2007.
Despite a slump on property company shares, valuers were slow to catch up with reality and commentators predicted a rapid rebound.
At one point, William Hill, head of property at Schroders, said returns would move back into positive territory before the end of 2008.
Investors are struggling to raise cash even though yield premiums are more attractive than a year ago, and the situation has got even worse over the past month. The Icelandic banks, such as Kaupthing, are calling in loans from the likes of Robert Tchenguiz. Lehman Brothers, another big real estate lender, has collapsed.
John Danes, head of UK research and investment strategy at Aberdeen Property Investors, said the sector will not offer positive returns until 2010 due to the lack of finance available from banks stricken by the financial crisis.
He said: “The average yield premium of property over Government bonds has been 2% over the past 15 years. Today the premium is pushing 3%. Property looks attractive, but the banks are not willing to lend investors money.”
Robin Goodchild, international director and head of European strategy at real estate specialists LaSalle Investment Management, said: “The availability of debt got worse last month. For the past 12 months, getting a loan greater than £50m has been hard work, because it needs more than one bank.”
Danes and Goodchild said a few banks are willing to lend money for property deals, but far fewer than at the beginning of the year. Loan-to-value ratios on new deals are 65% against highs of 90% at the height of the market last year, according to Goodchild.
Kevin Aitchison, chief executive of ING Real Estate Investment Management in the UK, said: “The fallout from this financial crisis will impact real estate over the next several quarters, but in general we can expect values to remain vulnerable to further declines and markets to remain turbulent for some time to come.”
Gerry Ferguson, head of UK property fund management at Scottish Widows Investment Partnership, looks after the £1bn (€1.3bn) Swip Property Trust, whose cash weighting has risen to 20% following redemptions in the sector. He does not expect to invest in any buildings until next year, except for any investments that are particularly good value thanks to real estate holders having to sell property to realise their assets.
He said: “A lot of banks are looking to recapitalise, which may lead to a number of properties coming back onto the market. Open-ended funds may also face more redemptions, which lead to more sales.
“I would expect capital values to fall into the first half of next year. It is difficult to know whether total returns in 2009 will be positive or negative: there is a greater probability of positive returns in 2010.”
Some people are refusing to capitulate. Anne Breen, head of property research at Standard Life Investments, said: “Investor appetite remains resilient with pension fund target weightings remaining about 10% to 15%.
“There is also the possibility that longer-term investors, such as private equity, vulture funds or sovereign wealth funds, rumoured to be circling the market, decide to put some of their cash to work.”
Goodchild
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