Recently in IPD figures Category

The property derivatives market is predicting total returns will plummet next year to -0.32%.

The figures were revealed yesterday at the IPD/IPF Quarterly Briefing.

IPD client manager Kate Pedersen said derivatives pricing from ICAP Property Derivatives showed the market is expecting a total return of 9.75% this year, but this will tumble to -0.32% next year.

For more on the Q2 derivatives trading volumes and a synopsis of the IPD Quarterly Index returns for Q2 listen to the EGi podcast interview with IPD research director Malcolm Frodsham and client manager Kate Pedersen by clicking here.

Research firm Capital Economics has released an update today on the UK commercial property market saying it believes yields are now close to a floor based on recent data from IPD and Strutt & Parker on leases.

Economist Kelvin Davidson says:

With the economy in recession for much of 2009, the latest data from Strutt & Parker and IPD suggest that landlords fared reasonably well last year, retaining a high proportion of tenants and in many cases even raising rents at lease expiry. Given that the economic backdrop remains fragile, however, we doubt that investors will feel confident enough about the near-term security of income streams to lower risk premiums. Thus, our view is that property yields are now close to a floor.

• The S&P/IPD Lease Events Review mainly focuses on factors which affect the income streams accruing to landlords from existing leases, e.g. the use of break clauses, changes in void rates and duration, tenant defaults etc. One positive result for landlords to come out of the latest review was that 38% of leases expiring in 2009 (weighted by rental value) were renewed by the existing tenant, slightly higher than 2008's result (33%) and well above 2007's figure of 17%.

Nomura Real Estate analyst Mike Prew has posted an interesting piece of information coming from today's final results of TR Property Investment Trust.

Prew says the Trusts fund manager Chris Turner, of Thames River, stated at the results today:

"In terms of the outlook for commercial property values, the mood of the industry is generally that the recent surge in pricing will moderate and come to a halt over the summer.

"Derivative market pricing for the IPD annual index futures suggests UK average capital growth will be around 4% in 2010. The IPD monthly index has already recorded average capital value growth of 4.5% in the January to April 2010 period, so the implication is that the rest of 2010 will show a 0.5% decline.

"Futures pricing also implies a 2% annual capital value decline in both 2011 and 2012."

British Land's shares have jumped 3% today after the company reported its first NAV increase since 2007 today.
In its full year results to 31 March, the company said the value of its property portfolio increased by 13.5% to £8.5bn.
British Land also said it was considering restarting its 610,000 sq ft 'Cheesegrater' development on Leadenhall Street, EC3, to take advantage of the expected upturn in City office rents.

Analysts have begun giving their reactions to the company's results announcement.

Nomura Real Estate says: "Today's NAV came in 5% ahead of our estimate and 7% ahead of consensus (472p) as a result of better-than-expected underlying growth in capital values (+13.5% versus our estimate of +10.9% for the full year) and the high leverage (47% including share of JVs). However, management cautions that it expects capital growth to be relatively muted over the coming 12 months, with prime yields remaining close to current levels. To offset this, the group is pushing ahead with three developments (total capex of c.£500m) and will look to step up its rate of acquisitions over the course of FY11, which it expects will help ease the pressure on cash flow (and improve cash dividend cover). The group believes the fundamentals for the London office occupational market are improving as occupier confidence returns, which is in keeping with both our views and those of the other companies/agents in the sector, and further backs its stance for developments in the London markets.

Today I went to the monthly Fundamentals briefing at Legal & General's offices in the City.

This month featured research on the commercial property sector and a view on what L&G believes is in store for property investors.

L&G Property's head of research Robin Martin said the best returns from UK commercial property this year will depend on good stockpicking of assets and a selective approach to taking on greater investment risk.

This is in contrast to 2009, which was all about avoiding risk.

Click here to listen to Robin Martin's interview on L&G's views on the outlook for the property sector

Interesting analysis in this month's UK Market Outlook report from Knight Frank's head of commercial research Claire Higgins.
Higgins looks at the influence party politics has on property's performance.

She says:
􀂃 It's 1974. Edward Heath calls a snap election for February, 16 months earlier than required,
in a bid to capitalise on the discontent caused by the miners' strike. All does not go to plan,
however. The Conservatives win 37.9% of the popular vote to Labour's 37.2%, but only 297
seats to Labour's 301. The Liberals make considerable gains from both parties, with
19.3% of the popular vote, but this only translates into 14 seats.
􀂃 It's a hung parliament.
􀂃 Heath resigns and Harold Wilson returns but, with the Liberals of insufficient number to form a practical coalition government with either party, another election is called for October.
Labour increases both its share of the popular vote and its number of seats, and ends 1974
with a majority of 44 MPs.

Why have prime property prices risen by 5% in the first quarter of 2010, on top of an 11% rise in the final quarter of 2009? Simple economics, the levels of supply were greatly exceeded by the huge amount of demand, in the form of large levels of cash chasing property, created by government financial stimulus.

But could that tide be about to turn?

Asset manager RAB Capital has expressed some worries about the UK residential sector's outperformance of the commercial sector, saying higher unemployment or base rates could threaten house prices.
In a research note today, the company says the recent support to house prices will disappear if either unemployment or base rates climb.

Researcher Dhaval Joshi says:

"During the huge property boom and bust that we've just lived through, the prices of US houses, offices, shops and industrial real estate surged and plunged in almost perfect lockstep. However, in the UK, there has been a marked divergence between residential and commercial property prices. Since 2006, according to Investment Property Databank (IPD) indices, residential property has returned 10%, while commercial property has returned -22%.
This divergence is very odd because residential and commercial property prices have the same long term driver. House prices ultimately depend on the purchasers' ability to buy them, which is to say, on average incomes. Commercial rents also closely track average incomes (see page 4). So residential and commercial property returns in the UK should be very similar, just like in the US.
One oft-cited reason for the divergence is the shortage of residential property in the UK. However, the construction shortfall relative to population growth is not massive. There is a much better explanation - the commercial market has felt the full force of the recession, while the residential market has been shielded. Commercial property is financed and re-financed by long term loans. Since 2006, this financing has been extremely scarce and expensive. In contrast, residential mortgages tend to have variable interest rates which have automatically plummeted in line with the base rate without any refinancing needed. Furthermore, employment has been supported by the creation of 350,000 public sector jobs, and by firms often opting to cut weekly hours rather than jobs. All of this has prevented a flood of home repossessions, and thereby prevented the bottom falling out of the UK residential market, as it has in the commercial market."

Institutional European pooled property funds delivered an annual total return of -1.6% in 2009, according to the IPD European Pooled Property Fund Indices (e-PPFI).

The bi-annual e-PPFI returned euro-denominated -4.2% in the first six months of last year, but this was reversed by a return of 2.7% in the second half.

However, it wasn't enough of a lift to pull returns into positive territory for the full calendar year.

IPD said the impacts direct property value movements, currency swings and leverage combined to produce a 95 percentage point difference between the best performing funds and the worst - at 43.6% and -52% respectively.

The 105 balanced funds in the index outperformed the 140 specialist funds, returning 2.1% and -5.3% in euros, respectively. Balanced funds' average leverage was 19.4%, compared with 44.4% for specialist funds.

The 165 core pooled funds, which include an average of 28.1% leverage, outperformed the 68 valued-added funds, leveraged at 51.1%, by almost 10 percentage points - at 0.2% and -9.6%.

For more IPD analysis of the figures, read on.