Ext Use Main title (22 pt) Subtitle (22 pt)

Download Report

Transcript Ext Use Main title (22 pt) Subtitle (22 pt)

CONFIDENTIAL
UK Real Estate Market
November 2006
Presentation: Glenn Newson, Head of UKRE
Asset Management
Asset Management
Title of presentation
Date (9pt): 03.11.2005
Slide 1
- Background to the Market
- Investment performance
- UK economy
- historic
- market
- sectors
- Changing investment patterns - institutions
- overseas
- debt
- REITS/derivatives
- Market expectations
Asset Management
Asset Management
UK Real Estate Market
November 2006
UK Economy
 Interest rates rose in November +0.25% to 5.00%
– Expectation of further increase +0.25% in early 2007
 Inflation broadly under control but energy prices pushed rates 0.50% higher than 2.0% Monetary
Policy Committee target
 GDP rose by 0.8% in Q2 2006 – highest level of growth in 2 years. Expected 2006 growth rate 2.5%.
 House prices continue to grow despite interest rate increase in August +0.25%.
 Benign economic outlook but increasing consumer nervousness
Asset Management
UK Real Estate Market
November 2006
Investment Performance
- Historic
 Commercial property delivered a return of 20.7% for the year to end September 2006. This compared
to gilts at 2.5% and equities at 14.7%.
 Calendar year returns to end August were 13.8% for property, 0.3% for gilts and 10.0% for equities.
 UK Property has outperformed equities and gilts over 1,3,5,10 and 15 year time horizons.* Fantastic
but potentially unhealthy and it should be remembered that past performance is not a guide to future
performance.
 Performance remains driven by yield compression and the All Property initial yield now stands at 4.7%
and the equivalent yield at 5.5%. Capital values in Q2 improved by 3.1% but August at below 1.0%
recorded the lowest return since early 2005.
 Of the 13.8% calendar year total return over 9.5% is derived from capital growth.
(* source IPD)
Asset Management
UK Real Estate Market
November 2006
Investment Performance
- Market
 Investment volumes have eased over the last quarter. Data to June shows a total of £7.5bn of
purchases. Significantly, despite the buoyant market, this is the lowest level for over 3 years. (Market
reaction or external factors?).
 The dominant feature of the market remains a shortage of good quality stock and this is true across all
price ranges.
The shortage of stock is easing slightly but the quality remains polarised with at one end the large
trophy assets and at the other the typically outmoded poorly located buildings in secondary locations.
The latter stock is generally being sold by the property companies who are seeking to take advantage
of the strong market to take substantial profit on secondary product.
Asset Management
UK Real Estate Market
November 2006
Investment Performance
- Sectors; office, retail, industrial
 After the close convergence of returns between the three sectors over the last few years, primarily
driven by yield compression, the sectors have now started to diverge.
This reversal has seen retail move from the top slot to the bottom, swapping places with offices.
This trend has been widely forecast, and the expectations are it will continue into 2008/2009, as
offices particularly central London, and in some instances the major provincial cities, experience rental
growth far in advance of any other sector. Whilst this may give rise for future concerns, at this stage
the mitigation is how far rents in central London fell in the last downturn, and therefore their ability to
recover. Rents likely to have grown 25%+ in the West End this year.
Asset Management
UK Real Estate Market
November 2006
Changing Investment Patterns
The UK real estate market remains attractive throughout the globe due to its position
within a stable but relatively benign economy, its world class legal system and its leasing
structure with upward only regular rent reviews. The number of market players is
increasing in diversity.
- institutional
 The institutions have been the dominant investor in the last year, by a significant margin,
fuelled by the “man on the street’s” appetite for the asset class. UK institutions invested
almost £2bn in Q2, 2006, approximately 20% of all transactions. The life funds have
been net sellers over the last year but this has largely driven a surge in property
investment vehicles which have doubled in the last year alone to £27bn.
 Asset allocation by pension funds to real estate still averages only 8% but many
actuaries accept that closer to 15% is preferable to achieve diversification. As the
investment “product” market widens so real estate diversification will require a greater
percentage of assets.
Asset Management
UK Real Estate Market
November 2006
Changing Investment Patterns (contd.)
-
overseas
 The German open-ended funds were net seller in early 2006 reflecting concerns over
internal structures. The outflows brought to the market a number of large prime UK
investments fortunately at a time when the market was categorised by a variety of willing
purchasers keen to acquire assets originally seen as long term holds.
 Middle Eastern investors remain active but it has been the Irish and Australians who
have coped best with the current low yield environment, as they can still see value in the
UK that is greater than they can achieve at home.
Asset Management
UK Real Estate Market
November 2006
Changing Investment Patterns (contd.)
-
debt
 Loans on real estate continue to rise and in part the Banks are responsible for fuelling prices as they
seek to lend to meet internal business targets.
 Although swap rates have moved up during 2006 they now appear stable. This movement means
that the arbitrage between the yield achieveable on real estate and the cost of debt is now broadly
negative, suggesting that investors are requiring either rental growth or further yield compression to
achieve profits. On an asset specific basis this could be a concern given the patchy prospects for
rental growth.
Asset Management
UK Real Estate Market
November 2006
Market Expectations
 High point in the cycle.
 Market players more diverse than ever – assist sustainability REITS – January 2007.
 Rental growth returning.
 Interest rates rising but modestly, economy generally benign.
 Modest performance prospects forecast for other asset classes but margin to gilts for liquidity at a
quarter of the traditional 200bps.
 Increasingly a global product – more players but bigger investible universe.
-
Our expectation of UK total returns for 2006 is 17%, fuelled by capital growth of 12% and a modest
level of rental growth.
-
Forecast total returns for 2007 and 2008 show a significant reduction to 7-8% which suggests some
softening of secondary yields, and limited rental growth outside of central London.
Unleveraged returns remain attractive but investors will need to accept that the performance is going
to be largely income growth led, and outperformance will require greater degrees of active
management than many have relied on to date.
Asset Management
UK Real Estate Market
November 2006
Important Information
 Past performance is not a guide to future performance; the price of real estate and the income from it
may fluctuate upwards or downwards and cannot be guaranteed. Real Estate may not be readily
saleable and the value of real estate is generally a matter of valuer’s opinion.
 This document has been prepared and issued by CREDIT SUISSE PROPERTY INVESTMENT
MANAGEMENT LIMITED One Cabot Square, London, E14 4QJ, www.credit-suisse.com/uk, Tel: 020
7888 1000, on the basis of publicly available information, internally developed data and other sources
believed to be reliable. Whilst all reasonable care has been taken to ensure that the information is
accurate and any assumptions made or simulations used are fair and reasonable, CREDIT SUISSE
PROPERTY INVESTMENT MANAGEMENT LIMITED, nor any director, officer nor employee, shall in
any way be responsible for the contents. This document does not constitute investment advice and
no reliance should be placed on its contents.
Asset Management
UK Real Estate Market
November 2006