January 2010 Archives

F&C REIT has released its first Market Review & Outlook for 2010.
The review is a quarterly property and economic overview of the preceding quarter and a look ahead to the coming quarter.
In summary, F&C says:

 The property market has seen a dramatic turnaround from mid 2009 to give a
2.2% total return for the full year. The recovery gained pace during the year
and the December IPD Monthly total return was a record 3.6%.

 The recovery has been investment led and yields have moved in sharply,
especially at the prime end.

 There is concern that the improvement may not be sustainable due to
weakness in the occupational market, a narrowing yield gap against the risk
free rate, increased supply of investment stock and in the light of prospective
tightening in economic policy.

 Momentum is likely to ensure a strong start to 2010 but there could be a
slowdown in the latter part of 2010 before a pick up in rental growth
enhances returns later in the forecast period.

 The outlook is highly uncertain with risks to the downside if the economic
situation deteriorates and yields move out but upside potential if growth is
stronger than forecast and filters through to higher rental growth.

 With investors focused on security of income, prime property is expected to
out-perform.

 Property benefits from an income return of more than 8% and this will help
deliver double digit annualised total returns over the medium-term.

When this popped into my inbox today, I couldn't quite belive my eyes:

London - Moody's upgrades Class M and Class B CMBS Notes of Business Mortgage Finance No. 1 plc

That's right, CMBS notes being upgraded. Haven't seen that in a while. Only a small issue, and not secured against regular commercial property (actually against loads of owner occupied small business type stuff), but a reason to be cheerful nonetheless.

CB Richard Ellis has released its Central London Office markets forecast for January today - see the story on EGi.
The highlights include an expected 20% rise in prime City rents by the end of this year to more than £50 per sq ft.
The agent said this would be driven by a shortage of new office space, with completions of new office developments to plummet in the next two years to their lowest level in nearly three decades.

CBRE's key points include:
• Although the latest ONS revisions for GDP suggest that the UK remained in recession in Q3, with output declining by 0.2%, economic growth is widely expected to have returned in the fourth quarter. The service sector grew by 0.1% between September and October, and Finance & Business services expanded at a rate of 0.2% over the same period, according to National Statistics.

• Following government support and Bank of England asset purchases, the sharp downturn in asset prices of 2007-08 has turned around since last spring. More positive sentiment has lifted financial markets, with the FTSE All Share up by around 43% since its March lows, while the UK commercial property market has followed, with a resurgence in investor demand. The Central London office market has been a major beneficiary, with the CB Richard Ellis Monthly Index recording capital growth of 12.5% for Central London offices since June.

The divergence between the investor market and the occupier market is expected to continue into 2010, according to Capital Economics.
The research firm said recent data had highlight that while European investment volumes rose in Q4 2009, rental values, fell.
Figures from JLL show that European commercial property investment rose to €25bn in Q4.
Capital Economics continues:
• According to CBRE, the increase in investment market activity was accompanied by modest declines in office yields in several Western European markets. This suggests that renewed investor interest in France and the UK earlier in the year is spreading to other markets.

The IPD Monthly Index is released today at 3pm. All eyes will be keenly watching the increase in UK commercial capital values after figures earlier this week from CBRE reported a record 3.3% rise in December.

Retail warehouses performed best, with values increasing 6.1% in the month.

JPMorgan analyst Harm Meijer said : "If the IPD index for December were to be similar to the CBRE gain, it would indicate that commercial real estate values have bounced by 9% from their downturn low and 7.7% over the last quarter of 2009.

"The CBRE index itself indicated a jump of 10.3%. We have a 12 month (Jun'09 - Jun'10) capital growth estimate of +15%, and 1Q10 estimate of c. +5%, and do not yet see a reason to upgrade our view."

Knight Frank's head of commercial research, Claire Higgins, has published her latest thoughts on the UK market outlook in her monthly commercial property review.
In it, she highlights November's IPD figures, which showed the biggest monthly rise in capital values for 15 years - at 2.36%.
"Perhaps even more intriguing was the reduction in the rate of decline in rental
values," she says.
"By which I mean they still went down, but not as much. This is somewhat counterintuitive in a recessionary market which lags unemployment trends, where you'd expect all things occupational to be getting worse, not better. It feels like a monthly blip to me, but perhaps December will have proved me wrong."

On the UK investment market volumes, Higgins says:

􀂃 The average quarterly volume of investment transactions in the last decade has been £8.8bn, according to Property Data.
􀂃 Admittedly, the last decade has seen some pretty turbulent levels of activity, ranging from a peak of £17.7bn in the last quarter of 2006 to a low of just £3.9bn in the first quarter of 2009.

CB Richard Ellis's Monthly Index figures have been released, showing capital values in the UK climbed a record 3.3% in December.
The monthly jump meant that following the turnaround in prices midway through last year, all property capital values ended the year down only 2.1%.
December's increase was led by the further strong performance of retail warehouses where intense investment demand meant capital values surged by a massive 6.1%.
The total return for UK all property was 3.9% in December, contributing to total returns of 4.0% for 2009 as a whole - a massive turnaround on the largely negative expectations held during the first half of the year.
However, rental values continued to fall, dropping 0.3% in December - the same rate as in November.

As you will no doubt have seen, Nathan Kirsh's 50p a-share takeover bid for Minerva lapsed today, meaning that the company remains independent, for now.

But a nice little story reaches me from the City about some serendipitous events relating to this deal and the City office occupational market.

Now, as you will have also seen, BlackRock and Canary Wharf today announced that terms have been signed for the investment manager to take up the whole of the 270,000sq ft office tower Canary Wharf has just completed in a joint vnture with Exemplar Properties, at a price of 50/sq ft.

Apparently, BlackRock was one of the bigger buyers of Minerva shares once Kirsh's takeover offer was announced. Why is this important?

So, something of a black Thursday for HBOS's joint venture partners. Two companies backed by the bank's Uberior joint venture division were put into administration today.

Now, it is important not to overstate the importnance of the timing. This is likely not a sign that HBOS - now part of Lloyds Banking Group - came back into work on Monday with a big axe and orders to cull their property partners. Discussions between HBOS and the two companies in question - Kilmartin and a subsidiary of Thornfield - have been going on for more than a year, and it is pure coincidence that both collpased on the same day.

What it does point to though, is the fact that Lloyds, after plenty of internal reshuffles and discussions on strategy, now have their ducks in order.

JP Morgan has today issued a new note on the listed real estate sector saying it believes property currently is neither a strong buy, nor a strong sell.
Analyst Harm Meijer also includes his 10 "must-know" facts about commercial property for 2010.

"As is widely known, a lengthy degearing process and potential withdrawal of stimuli is upon us. In this note, which is a follow-up on 10 Forecasts for 2010 (9 Dec 2009), we focus instead on the bright side and present thought-provoking facts on commercial real estate. Our view: the listed sector is not a strong buy, nor a strong sell, but offers a solid 12 month expected total return of 10% and stocks with different investment themes: Big Yellow (preferred recovery play), British Land (very predictable cash flow and acquisition power), VastNed Retail (8% div yield) and alstria (for those concerned by sovereign credit risk) . The 10 must-know facts:

• 1. European property stocks are still 55% below their 2007 peak (UK: 61%) vs. European equities 24% (FTSE 100: 11%).
• 2. Commercial property values in the UK are still 41% below their Jun-07 peak and in real terms 65% lower compared to 1955.
• 3. Commercial real estate in the UK has severely underperformed residential: total return of 10% pa vs 14% since 1972, while it rose 46% less in value over the (post dotcom) period 2001-04.
• 4. Property stocks have not bounced as strongly as they did after other severe downturns (currently 102% vs. 70s: 221% and 90s: 185%).
• 5. In our view, it is time to close the underperformance gap with ungeared direct property (since end 1970), but stock picking is important as the listed sector needs to work on its 'cycle timing', in particular largecaps. A number of smaller stocks however, like Great Portland and Helical bar, have a solid long-term track record.
• 6. Yield spreads are close to all time highs: vs. LIBOR almost 7%, vs. 10 year government bond yield 3.2% and vs. corporate BBB 1.5%.
• 7. Lease length of 6.2yrs (UK 8.6yrs), quality assets and inflation hedging characteristics should support income.
• 8. The UK commercial property market is returning from negative equity. There is around £250bn of lending outstanding of which around £35bn will mature in 2010. Property companies have unused credit lines at 35-60bp margin to take advantage of this.
• 9. Property investment volumes are picking up and, in our view, have some way to go (currently 32% below average).
• 10. Share price volatility is close to all-time high (beta of 1 vs. long-term average of 0.55), but we see it falling (later on) in 2010."

The good news coming from the property funds sector has continued for another month with the Investment Management Association (IMA) today releasing net investment figures for November.

Property funds were the top selling fund sector for the second month in a row in November with £438m of net sales.

The result was significantly higher than the £377m of sales achieved in October.

Property's position at the top of the list in November is in stark contrast to January 2009, when the sector ranked 28th out of the 34 sectors covered by the IMA.

In November, property funds recorded £417m of net retail sales - the highest achieved since March 2007 when £467m of sales were made.

King Sturge today kicked off the New Year with predictions for the property market for 2010 and beyond.
The company's Property Predictions 2010 report says this year will produce the best returns in four years, but capital values could collapse again in 2012.
As for its outlook, King Sturge believes:
- 2010 will produce an All Property total return of 12.8%, with capital values climbing 5%, but rents falling 4%.
- Rents will fall throughout the UK and in most major European markets until 2012.
- The gap between the office markets in London and the rest of the country will widen, with the capital seeing a reversal of fortune, leading the office market recovery in 2010.
- Prime City rents are expected to climb 10.5% this year to £47.50 per sq ft, and 7.6% in the West End to £70 per sq ft.
- Canary Wharf is tipped as London's hotspot for the office market with occupancy rates predicted to fall from their current levels of 13% to 7%, and perhaps even less.
- The current investment "bubble" for prime real estate is likely to soften in the first quarter, and secondary stock will continue to languish.
- Bank finance will slowly become increasingly available, but with £32.6bn of debt due for redemption this year, refinancing this will prove impossible without a continuation of the "pretend and extend" policy the banks are exercising.
- Not wishing to write off significant debts to their balance sheets, toleration of all but the most serious breaches will be necessary, extending existing loan agreements.

As the headline states, lenders are still cautious about the commercial property sector, according to the first ever Jones Lang LaSalle report into bank lending expectations - but there is definitely reason to be cheerful in this report.

William Newsom at Savills pioneered this kind of research into which banks were in the market, and how much they were willing to lend, and his benchmark definition of a 'big ticket' deal always used to be £100m.

In the dark days of 2009, commercial property was such a dirty word for lenders that no banks were willing to lend that much, and the definition of being 'in the market' moved to just £25m.

So the fact that JLL's report shows that 30% of banks are willing to lend between £50m and £100m, and 12% of banks are willing to lend more than £100m is actually a cause for a little bit of cheer - the goalposts are being moved back on to the right pitch.