UK commercial real estate breakout may lead the way up for European stocks

 

06 9월, 20:15www.property-magazine.eu

Confidence over the sustainability of the British economic recovery has spread from London to the broader UK commercial real estate market, a pattern likely to be mirrored in continental Europe and underpin shares of listed property companies, an Exane BNP Paribas analyst told the European Public Real Estate Association’s (EPRA) annual conference in Paris on Thursday.

 

 Nick Webb Property Analyst at Exane BNP Paribas said: For the last few years, the strong performance of the London property market has made it feel like a different country. Now the UK real estate recovery finally looks as though it’s going nationwide. Capital values have already broken their 18-month losing streak, while key leading indicators – like the RICS survey – suggest that 2014 could be the first year of average rental growth since 2007. Back before the financial crisis, UK commercial real estate started falling earlier, faster and harder than Continental European markets. We may see markets on the other side of the channel starting to take a similar shape in recovery, but again lagging the UK on the way up.”

 

 UK consumer confidence is rising and retailer failure rates have declined to normal levels, creating a much more stable environment for retail landlords. Rapidly evolving supply chains are also bolstering strong demand for new logistics space, helping an industrial sector which hasn’t seen real rental growth since 2002. Furthermore, improving mortgage availability and the strong stimulus provided by the British Government’s “Help to Buy” scheme look set to drive up house prices and volumes in all UK regions. Estate agents have never been more positive about the prospects for volume growth in transactions.

 

 Nick Webb added that UK long-term interest rates have already responded to the improvement in the UK’s fundamental economic environment. The 10-year UK government bond (gilt) yield rose 100 basis points to 2.6% between May and July. But rising rates are not as big a worry for property markets as many people think, he said. Statistical analysis by Exane BNP Paribas reveals a few interesting facts:

 

 • The long-term statistical correlation between UK property equivalent yields and nominal gilt yields is zero.

 

 • Inflation expectations appear to be the key driver of property values – so liquid and faster reacting real estate equities actually tend to outperform the broader equity market in rising interest rate environments.

 

 • Pension funds have historically allocated higher proportions of their assets to property in high interest rate environments than in low ones.

 

 Nick Webb concluded: “In Continental European markets we don’t yet see the signs of life in the real estate occupier or investments markets that are apparent in the UK. But there’s good news, particularly for listed property companies that own many of the prime assets in European cities. The retail property markets never suffered from the excessively high rents or strained affordability of the UK market and retailers have proved far more resilient to weakening sales. Here in Paris, for example, the office market doesn’t look too healthy today, but with a vacancy rate of just 6% and a thin development pipeline, it is well-placed to recover when macroeconomic fundamentals become more supportive.”