UK Reits Survey - Market to Stabilise

publication date: Apr 27, 2010
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

UK Reits Survey - Market to Stabilise

A survey of the UK’s property experts and real estate investment trusts (Reits) has said that the market will stabilise this year, albeit after a bit of a rough ride.

Reits is short for “A Real Estate Investment Trust” (Reit) and they are the property equivalent of a stock broking company that manages a portfolio of (typically) commercial property. Investors earn money from a REIT by becoming a shareholder of the company and receiving pay outs when profit is made.

A recent survey of experts suggested that the recovery enjoyed by the property sector over the last six months was set to continue, with 70 per cent saying that values would stabilise in 2010 and a further 10 per cent expecting them to continue to rise.

There has been a debate over whether UK Reits should concentrate more on delivering income returns to investors rather than a total shareholder return approach. 55 per cent of people surveyed said that the UK sector generally strikes the right balance, with 35 per cent wanting to see a reduced focus on developing new properties.

With development now beginning to restart across key development sites, 65 per cent of respondents believe that a return to speculative development is either already happening or imminent. The government’s cut in business rate relief for empty properties was seen as a massive blow to the development of space without pre-lets as owners have to pay up to 30 per cent of the value of a property a year in rates, stiffling speculative development over the last couple of years.

However, as the country emerges from recession, reduced supply and rising occupier demand are encouraging selective speculative developments again.

Other findings from the latest survey included:-

  • Only 15 per cent currently expect increased regulation of UK and US banks to have an adverse effect on the London property market.
  • Expectations about how the yield spread between primary and secondary property would behave over the next 12 – 24 months were balanced, with 50 per cent expecting little movement.
  • The panel was split 50/50 over whether media focus on failures had led to an underestimation of the retail sector’s resilience.

Metric Property Investments is the UK’s newest Reit, focussing predominantly on out of town retail and shopping centres. Headed by former British Land Head of Retail Andrew Jones, Metric is promising a ‘bottom up approach’ with a belief that staying close to customers and giving them what they want could open up a host of opportunities.

Andrew Jones, Chief Executive of Metric, said:

    “Overall I expect values to fall a small amount this year, although this disguises enormous discrepancies across the wider industry. London – essentially a city state – has seen a very quick resurgence but it’s not typical of the UK market. Retail capital values will fall small amounts not because yields are going to move out, but because as leases get shorter, the over rented income becomes a more critical factor in assessing value. If you look at the income yield, in retail, today it is higher than the reversionary yield and so as leases get shorter the market rental income becomes a more pertinent metric than the passing income.

    “I think disposable income is going to fall and so I’m not convinced it’s a steady ride up – there will be some re-adjustments down. But I think Reits are in great shape. I think they’ve got great cashflow and they’ve got some good real estate, that add up to being great income propositions.”

Reita Chairman Patrick Sumner, Head of Property eEuities at Henderson Global Investors, said:

    “Values will continue to rise and then stabilise, I think there is still more to expect, but then at some point in the second half of this year I think they will stabilise. In terms of the amount, I think between five to ten percent wouldn’t be surprising but this will be very location or sector specific. I think it’s going to be central London - offices, some retail - but not much elsewhere.”

Peter Cosmetatos, Director of Reita, said:

    “It’s understandable for markets to be so jittery around an election, but while the prospects for who will be governing us remain uncertain, what is crystal clear is that there will be cuts and spending constraints in the public sector. Where big regeneration schemes are concerned this will have an impact on Reits as far as development is concerned since it will be harder for them to make schemes stack up and projects that may have happily commenced back in 2007 will continue to gather dust.

    “What we’ve seen through a stream of positive results from leading Reits such as British Land, Liberty, Shaftsbury, Land Securities, Hammerson and others is a clear indication that listed property has come through the worst and that Reits have been fully disaster-tested. We know that changing consumer habits are affecting spending although we’ve managed to avoid the full-scale disaster many predicted in terms of shops and business collapsing en masse. Retail landlords will nevertheless need to take stock of the post-Amazon generation of shoppers and find new ways to ensure their tenants are profitable and that ultimately they can repay their own investors. With that in mind, a customer-focused future will be essential for all Reits.”

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