Property managers rush to central London as UK market stabilises

Property fund managers are flocking to the central London office market in the expectation the capital will outperform other regions, as the UK property sector’s recovery since the financial crisis begins to stabilise.

According to managers in the sector, the rally the UK property market has experienced over the past 12 to 18 months is now coming to an end.

Investors will have to search harder for areas of growth and central London offices and retail spaces are being targeted as one such area.

“We bought a central London asset last year and have seen good returns on that. Generally we have been focusing on London and the South East,” said Gerry Ferguson, manager of the £2.3bn SWIP Property Trust.

“The UK market is quite polarised and differentiated on a geographical basis. London is doing reasonably well compared to the North and Scotland, which have been more impacted by poor GDP outlook and relatively tight supply.”

Philip Nell, manager of the £1.9bn Aviva Investors Property Trust, has also upped his exposure to central London from a zero weighting to 5%, after selling out of his 8% weighting to the City in 2007, increasing his overall exposure to central London to 14%.

“In 2007, we took the view the City was going through a bad patch, so we pulled our assets out of the market. However, when the occupier recovery started in late 2009, we reviewed a number of City of London acquisitions.”

Income seekers

According to Ferguson, investors will look to the UK property market for income rather than capital appreciation over the next five years. He forecasts a 7%-8% return from the sector for 2012.

“It is fair to say the bounce back in the UK property market has very much ceased, in the sense capital growth is difficult to come by on a month-to-month basis. It is now all about income and that is going to be the story over the next five years,” added Ferguson.

But Marco van Bussel, manager of the £67m First State Global Property Securities fund, believes the market is yet to bottom out: “Volatility in the global markets has pushed down prices, improving valuations,” he said.

Strong performance

“There has been quite strong performance in the real estate investment trust (REIT) market globally. Valuations are not stretched but more or less fully valued now.

“Together with negative revisions on economic downgrades, this has created a difficult environment. We have a bit to go before it stabilises,” he added.

Alex Price, chief executive of UK-based property investment firm Palmer Capital, said the rebound has been overestimated by the industry.

“The bounce-back in value has been different across the UK. Some of the central London offices have recovered much of their lost value, while others, such as industrial and retail units based in regional areas, have seen a much smaller recovery.

“If you look at shopping centres across the UK, they fell in value by about 55% since 2007, and have only improved 5%-10%, so they remain at half their value,” he said.

Twin-track market

According to Price, the polarised nature of the UK market has created a “twin-track market” in the UK, with foreign investment spurring growth in London and leaving the regional areas neglected.

“You have a highly liquid, sought-after market in London for residential and offices where lots of buyers compete for the opportunity to buy those assets,” said Price.

“Investors who have economic instability in their home countries, that could be Bahrain, Greece or Italy, now want to buy in London because they know their investment will be safe. But if you are trying to find those same people buying elsewhere in UK, they are not there, they do not view it as the same,” he added.

Unlike Nell and Ferguson, Price has advised his clients to hold off buying central London properties at present.

“We are advising investors not to buy now in London. We are saying do not buy the prime stuff as it has recovered most of the value already. It is better to add the less loved commercial property,” added Price.

The UK property market suffered substantial losses as a result of the economic downturn, with UK property funds losing 17.95% on average in 2007 and 21.88% in 2008.

They recovered 6.91% in 2009 and 7.61% in 2010. However, returns this year have been more muted at 2.54% to date, according to Morningstar.