Confidence is key in the property world
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Whilst there has been an upturn in activity in the UK commercial property sector since mid-2009, there is a view that investor sentiment towards the sector has cooled and we may be heading towards a period of consolidation.
The performance of the property sector has national significance, with it being estimated that nearly half of all commercial investment property is owned for the purpose of providing returns to UK pension funds and other personal saving schemes.
Pooled property funds are perceived as attractive for investors, offering access to expert management and potentially competitive income returns in the current low interest rate environment. Expectations are that the next six months may herald the start of banks bringing to market properties against which breached loans are secured. If so, expect property funds to target acquisition of these assets and in some cases invest in debt and preferred equity positions to aid recapitalisations and restructurings. A crucial issue will be how banks deal with property which is not at the top end of the market. Cash-rich institutions may be disinclined to acquire such properties their weaker covenants, shorter leases or secondary locations and banks will be reluctant to lend against them. With debt still hard to access and control of investments an important requirement, a growing trend is for cash-rich overseas institutions to enter into a partnership with UK property companies who possess the management expertise and local knowledge to deliver a successful project. Encouragingly, retailers have reported an increase in year-on-year sales for September, the third consecutive month of growth and CBRE and Jones Lang LaSalle have recently reported quarterly results well ahead of expectations, both having benefited from an upturn in the transactional market. However, they each warned of a possible economic slow down and concern has been expressed that opportunities are limited to a small number of sectors and locations, such as London West End retail, which have reasonable rental growth prospects.
These positive signals ought to be viewed in conjunction with the austerity mantra of the coalition government, spending cuts and higher taxes. Certainly, higher levels of confidence can do no harm as we wait to see if the lull in activity is the calm before a surge of activity or the start of another period of reflection for the real estate sector.
Jonathan Cantor is a partner in the Funds and Indirect Real Estate team at Nabarro LLP