February 2010 Archives

SEGRO this morning issued its full year results reporting an increase in vacancies across the portfolio.
The company also issued a cautious statement on the prospects for the UK industrial sector.
Vacancy rates rose from 10.9% at 30 June 2009 to 13.5% at 31 December, partly due to SEGRO's acquisition of rival Brixton.
JPMorgan analyst Osmaan Malik gave his review of the company's results, saying the outlook was in line with expectations and there was no surprise on vacancy rates.
"SEGRO reported an NAV of 362p (10% NAV discount), as the portfolio in the UK (ex-Brixton) was revalued upwards by 9.8% in 2H (+8.9% inc Brixton) - comfortably beating IPD industrial which rose 7.0% over the same period," he said.
"We believe this was partly due to reversing the underperformance in 1H.
"All eyes are on vacancy, following the acquisition of Brixton's high vacancy portfolio.
"On a like for like basis, vacancy was stable over 2H, which we anticipated, but may disappoint the market looking for a quick improvement.
"Actual vacancy increased slightly due to sales of well let assets, and the group rate stands at 13.5% inc. Brixton.
"Management's target remains the same: to reduce the Brixton vacancy from 22% currently to 15% within 3 years, which would take the group rate from 13.5% to c.12%.
"Management wants to see this then reach 10%. Management did say they see lettings momentum picking up."

Research firm Capital Economics has released its latest roundup on the UK commercial property market for the past month.
Analyst Kelvin Davidson makes the following key points:

• The economy remains subdued, with the public finances in a poor state, retail sales declining sharply in January and unemployment rising again. All of this simply reinforces our view that GDP will grow by just 1% this year, with inflation falling from around the middle of 2010 and the recent rises in bond yields also likely to be reversed.
• Market intelligence over the past month showed that respondents to the latest REITA survey expect the current downturn in rental values to continue, albeit for a shorter period than in the early 1990s. Continued rises in retail availability support that view. Admittedly, one bright spot is that office takeup, especially in Central London, has begun to improve.
• The IPD Monthly Index showed that rental values fell further in January, though the monthly decline (0.2%) was the smallest since September 2008. Indeed, consistent with strong take-up, City and West End office rental values actually increased in January. Central London office rental values are set to rise further, but we still expect the IPD all-property average to fall by about 3% this year.
• The investment market upturn continued in January, albeit at a slower pace. IPD initial yields declined by 8bps (from slightly above 7% to slightly below), a smaller fall than the average of 20bps in each of the previous four months. The fading rally in real estate equity prices supports our view that the rebound in IPD capital values will have broadly ground to a halt by the middle of 2010.
• Propertydata.com figures showed that investment market activity declined sharply in January, from £4.3bn in December to £1.1bn. However, part of that decline was due simply to normal seasonal influences. Indeed, in our view, transactions activity is more likely to be strong than weak in the coming months, as institutions spend the large capital inflows that they have received from retail investors.

Brokers have had a mixed reaction to Hammerson's full year results announced today.
The company's portfolio rose in value by 6% in H2 - with an 11% rise in the UK. But, for the full year, values were down by 9% to £6.5bn.
This valuation movement led to a 13% rise in net asset value in the second half of the year to 421p a share, but an overall NAV drop of 18%.
JP Morgan analyst Harm Meijer said the H2 rise in NAV was slightly above his expectations.
"Most importantly, like-for-like rental growth, one of our key performance indicators, of +1.1% was above our estimate of 0%," he said.
"Overall, we believe these results underpin our model input and currently forecast around 16% total return for Hammerson (similar to UK largecaps in general).
"However, we reiterate our view that a lengthy de-leveraging process and rising bond yields is upon us, which means that investors do not have to enter the sector at any price.
"Our 2010 theme remains: buy on weakness, but do not chase stocks to higher levels."
On the other hand, Nomura Real Estate says its house view remains Neutral on Hammerson, with the NAV broadly in line with its expectations.

Capital Economics has issued a revised forecast for UK commercial property saying it expects IPD capital values to climb 10% this year and total returns to reach 18%.

It says this is in light of the "sheer momentum in the market and the fact that property is starting from a point where it looks slightly cheap".

However, it added that subsequent years beyond 2010 may not be as bullish with lenders remaining under pressure to reduce their exposure to property from its current record-high level.

Analyst Ed Stansfield said he also expected GDP growth to be below trend both this year and next and the labour market correction was not over yet.

"This suggests that property occupier market prospects remain weak. Indeed, we expect IPD all-property rental values to decline by 3% in 2010, before rising only moderately (by 1% or so) in 2011."

Stansfield adds the major risk to the new forecasts is the tightening in monetary policy that will come "at some point".

However, for now, Capital Economics does not expect interest rates to rise until 2012 at the earliest.

"However, the limited scope for rental uplift over the next few years suggests that commercial property prices will be vulnerable to renewed falls at the point at which rates do eventually start to rise," said Stansfield.

For the full Capital Economics report, click here. UK Commercial Property Analyst (Q1 2010).pdf

CBRE's latest European Capital Markets report for Q4 2009 claims the commercial property market is seeing the first signs of a positive shift in sentiment among banks to lend to the sector.
It says the recovery in prime real estate values and investment market turnover in the second half of 2009 has improved sentiment in the European debt markets.
However, it added the change in attitude was heavily concentrated on the top end of the market.

Under the report sub-heading "Debt Markets", CBRE says three of the key changes it has witnessed recently include:

It adds the shift in sentiment has also led to increased competition among debt providers to offer improved lending terms on loans secured against prime real estate.
To read the full report click here:.EMEA_FPR_CAPITAL_MARKETS_MV_Q4_2009[1].pdf

Knight Frank's head of commercial research, Claire Higgins, has released another edition of the monthly UK Market Outlook report.
In it, she highlights the issue of yields and investments and which segments of the market are winning.

Higgins says:
􀂃 A key theme of recent investment activity has been the quest for prime property, with a gradual spread to better quality secondary as the best assets prove either unavailable or the subject of very intense competition.
􀂃 Little decent information is available on poorer quality properties, but IPD's quarterly index helpfully provides some analysis broken down into quartiles by yield.
􀂃 Thus we're able to look at how yields have moved over the course of 2009 for the 25% of properties with the lowest yield, set against the 25% with the highest yield. It's not a perfect proxy for the good versus the ugly, but it's a start.
􀂃 IPD's research shows the better class properties have seen yields chased down notably across the board. With only the sad exception of shopping centres (which, given the lot sizes, is a sector to have suffered more than most from restrictive finances), all segments saw yields improve in their top quartile of properties.
􀂃 In particular, this was true for Standard Retail, Retail Warehouses and Central London offices. Indeed, the latter two of these were the only segments also to see yield improvement among their worst properties.
􀂃 Interesting, then, that Central London offices should, according to IPD, also be the
segment that saw the highest level of net disinvestment during 2009.
􀂃 In H1 09, disinvestment was across the board, but H2 tells a different story as the retail and industrial sectors start to see net purchases as activity restarted. Not so offices, and notably not so for Central London.
􀂃 The conundrum of significantly improving yields but dramatic disinvestment implies buyers outside of IPD, most likely overseas. How will we continue to benchmark a segment for which the best properties are no longer in our index?

Higgins adds that while the UK is now out of recession - just - there remains a significant amount of caution about the economy.
"Property provided a positive return last year, the economy is growing (just) and if
you work in the Central London market you're probably wondering why no one's
opened the champagne yet.
"I'm not going to end with my usual note of caution. Instead, let's just enjoy the moment."

British Land has today posted an 18% jump in its net asset value to 438p a share for its third quarter results. The rise was driven by recovering capital values across the property sector.
Brokers have begun analysing the figures and giving their opinions on the company's results.
JPMorgan's Harm Meijer said: "We believe today's results underpin our positive view on the company and reiterate our view that its investment case is very straightforward:
1. Stock trades at Dec-09 NAV of 438p,
2. 6% dividend yield,
3. Today's results make us very comfortable on our forecasts (our year-end NAV forecast of 464p only requires 3% capital growth),
4. 272,000 sq ft of new lettings and still 655,000 sq ft of office available,
5. £3.2bn of cash and unused credit lines at 48bp: the company sees further investment opportunities within 18 months (our view: no need to rush),
6. Income growth of 1.4%, 13 years lease length (only 7% to expire in three years), 11.2 years debt maturity and 94% occupancy,
7. Net portfolio yield of 5.8% and gross topped-up of 6.7%.
Overall, we believe this is the type of company that should appeal to investors: what you see is what you get with a potential surprise to the upside. Please see our alert, sent out separately today, for more details.

Nomura analysts Robert Duncan and Mike Prew say the following about BL:

CBRE may have provided the first evidence of an anticipated slowdown in the recent rate of capital growth.
The agent's Monthly Index for January has posted a 0.9% rise in capital values.
The figure is significantly lower than December's record-breaking monthly rise of 3.3%.
Total returns were also lower in January at 1.5%, compared with December's 3.9% increase.
Central London offices saw the strongest performance over the month, with total returns of 2.2% - but this was about half of December's 4.3% figure. Capital values rose 1.7%.
By contrast, retail warehouses showed the most significant slowing in capital growth with a rise of just 0.6%, down from 6.1% in December.
The retail sector saw a 0.7% increase in capital values and a 1.3% total return. Industrials posted a 0.5% rise in capital values and a total return of 1.2%, while offices reported a 1.3% rise in values and 2.0% total return.

Aberdeen Property Investors expects UK commercial property to undergo a two-stage recovery in total returns in the coming two years.
The company released its latest UK Property Snapshot today, saying the recovery will be reminiscent of the mid-1990s with an initial surge driven by the investment market, followed by a rental market-driven improvement.
"We expect 2010 to be a very strong year for performance, as yields continue to
fall sharply in the first half of the year, despite rents continuing to decline, albeit more
slowly," says Aberdeen.
"Investment demand from UK pension funds, the retail funds, private UK investors,
overseas investors, REITs and property companies is expected to continue rising over
the next few months, leading to increasingly competitive bidding which will drive up
capital values further."
But, beyond a strong total return performance in 2010, Aberdeen is predicting returns to "drop back sharply" in 2011 as interest rates and bond yields rebound, while rental growth struggles to resume.

Evolution Securities has begun coverage of Canary Wharf's largest shareholder, Songbird Estates, with a Buy recommendation.
Its analysts Harry Stokes, Alan Carter and Paul Pulze - who joined Evolution from Citigroup last year - have a target price of 185p for the company.
Songbird is currently trading at 165p.
"A historically under-valued portfolio, leveraged into City rents, and a 97% geared balance sheet make a heady cocktail," said Evolution.
Their key thoughts on the company are as follows:
► Songbird is a unique company in the sector - Its sole asset is a 69%
shareholding in Canary Wharf Group. It is a virtually pure play on central
London offices with heavy exposure to financial markets.
► Balance sheet has been restored - Its historically high leverage business
model exacerbated the 34% fall in portfolio value in 07 and 08, but a major
re-capitalisation by China Investment Corp and Qatar Investment Authority
has stabilised the business.
► Canary Wharf may attract City tenants - We are forecasting headline City
office rents to rise by 20% in 2010 to £55 per sq ft. CWG's assets are valued off
estimated rents of £37.50. This gap may tempt tenants to consider the Wharf
as an alternative location.

Capital Economics has released its monthly view on the property sector saying it expects the economic recovery will remain slow, undermining rental values.
Among the key points, the research firm says:

• The economy emerged from recession in Q4, but the 0.1% increase in GDP was well below expectations. We expect conditions in the labour market to deteriorate again and GDP growth to remain below trend this year. Accordingly, official interest rates are likely to remain unchanged throughout 2010, with recent rises in inflation and bond yields set to be reversed.
• Market intelligence over the past month showed that net property lending flows remain very low and the availability of credit is unlikely to increase materially for some time yet. Other data showed that office take-up in Central London continues to improve strongly, while occupier demand conditions in the retail sector remain soft.
• The IPD Monthly Index showed a further fall in rental values in December, with all three main sectors contributing to the decline. Although the rate of decline in rental values has slowed in recent months, a generally subdued economy and renewed falls in employment mean that they are likely to drop further this year.
• For now, however, the recovery in the investment market remains rapid. IPD initial yields fell from 7.3% in November to 7% in December, and capital values rose by 3%. That was the biggest gain in the 23-year history of the IPD Monthly index. The rally in real estate equities, however, appears to have lost a little steam of late, supporting our view that the rebound in capital values is likely to have lost momentum by the middle of the year.
• Propertydata.com figures showed that investment market activity increased strongly in December, from £2bn in November to £3.4bn. Over Q4 as a whole, UK institutions made their first net purchase of property since Q2 2007, and continued strong inflows into retail funds suggest that institutions are set to remain net buyers over the coming quarters.