REIT market expected to stabilise this year, according to survey

Written by Ray Clancy

Thursday, 29 April 2010 12:00

A survey of the country’s leading property experts and real estate investment trusts (Reits) has said that the market will stabilise this year but that the jury is still out on whether George Osborne is fit to run the economy if the Conservatives win next month’s general election.

The latest Reita Expert Panel survey showed that only 15% had reached a firm view about the shadow chancellor while 45% were not convinced by Osborne and a further 35% said they ‘could be’ convinced.

In a different question, only 5% said they were confident the Tories would be significantly better for the property industry.

However, the survey suggested that the recovery enjoyed by the property sector over the last six months was set to continue, with 70% saying that values would stabilise in 2010 and a further 10% 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. In the survey some 55% said that the UK sector generally strikes the right balance, with 35% wanting to see a reduced focus on developing new properties.

With development now beginning to restart across key sites, 65% 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, and speculative development has all but halted over the last couple of years.

Only 15% expect increased regulation of UK and US banks to have an adverse effect on the London property market, the survey also showed.

Expectations about how the yield spread between primary and secondary property would behave over the next 12 to 24 months were balanced, with 50% expecting little movement.

But Andrew Jones, chief executive of Metric Property Investments, the UK’s newest Reit, said overall expects 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,’ he explained.

‘I think disposable income is going to fall and so I’m not convinced it’s a steady ride up and there will be some re-adjustments down. But I think Reits are in great shape, certainly the two biggest ones. I think they’ve got great cash flow and they’ve got some good real estate, that add up to being great income propositions,’ he added.

Reita chairman Patrick Sumner, head of property equities at Henderson Global Investors, believes that 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 5 to 10% wouldn’t be surprising but this will be very location or sector specific. I think it’s going to be central London but not much elsewhere,’ he said.

It is understandable for markets to be so jittery around an election, according to Peter Cosmetatos, director of Reita. ‘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,’ he said.