Gold rush hits prime property - UKCIG

A dramatic turnaround in the European commercial property market is already leading to fears of overheating in some cities.
Fund houses such as Hermes and Threadneedle are implementing measures to stagger inflows after attracting a flood of money, even as other investment managers are only now scrapping the redemption restrictions they imposed at the height of the financial crisis.

And in spite of UK commercial property prices plunging 45% from the peak, there are concerns that top-end property, particularly in central London and Paris, may already be fully valued.

"There is a bit of a goldrush mentality. We are getting very close to deals not being good value in the London prime sector any more and very close to it in Paris," said Matthew Richardson, head of European real estate research at Fidelity International.

Yields on prime London property, which move inversely to prices, have already fallen from about 6.8 % to as low as 5.5%. "The pace and extent of this yield snap is unprecedented. It's not sustainable," said Keith Sutton, director of European real estate at Fidelity. "As a short-term play it's kind of over in prime London and Paris now."

Other managers also have concerns. Chris Mathew, Fund Director of the Hermes Property unit trust, warned of a "clear disconnect between the strengthening investment market and the occupier markets, where rental values are still generally falling and voidsrising".

Chris Morrogh, fund manager and director at Threadneedle Property Investments, added: "Central London is surprisingly expensive. Given the difficulties in the financial sector we would expect to be getting quite attractive pricing in that market, but we are not."

Fiona Rowley, manager of the M&G Property Portfolio, said she was "avoiding" West End London offices because of tumbling yields.

Market sentiment gathered steam in the summer as data suggested both European property markets and the global economy bottomed out.

Miles O'Connor, head of UK institutional business at Schroders, said the group had participated in 22 searches from large investors since July, compared with just two in the first six months of the year. "There has been a huge amount of interest from corporate and local government pension schemes," he said.

Industry figures argue the wider property market is still attractive, with the yield spread between prime and secondary property, as measured by the Investment Property Databank, having trebled since March 2008. "Generally we think it's a good time to be coming back into the market. Anything that is not prime is off the radar screen," said Sutton, who said yields of 7 to 9% were widely available in the secondary market.

The rapid bounce-back in prime markets is partly attributed to this being the first property market recovery to occur in an era of globalised, crossborder real estate investment, rather than the smaller, fragmented domestic markets that dominated as recently as the 1990s.

Overseas investors are said to have been particularly attracted to the UKCIG market by the weakness of sterling.

In addition property yields look attractive compared to the meagre nominal returns available from gilts, while the pipeline of new developments is at historically low levels. 


UKCIG Investment News, November 2009