Direct and synthetic property market upturn in Q3, IPD says

All three sectors delivered positive capital growth for the first time since the second quarter of 2007 over the three months to September, delegates at the IPD/IPF PDIG Quarterly Briefing were told.

According to the IPD UK Quarterly Property Index, the 1.5% positive capital growth recorded over the third quarter was the largest quarterly figure since Q4 2006. A modest upturn was also confirmed in the synthetic market with IPD’s Head of Indices Angela Sheahan revealing to delegates that Q3 global property derivatives trading volumes were the strongest this year – with £762 mln. worth of contracts executed in 78 trades. The UK still dominates, accounting for £670 mln. in 69 trades.

At the morning seminar – hosted by law firm Herbert Smith – Rebecca Graham, Senior Analyst at IPD, told delegates: “Five out of IPD’s 10 market segments delivered positive capital growth, led by Retail Warehouses which gained 4.0%.” The chart below illustrates quarter segment level improvement.

In the Q&A session which followed, conference chair IPD Co-Founding Director Ian Cullen, asked Gary Sherwin, Head of Retail Investment at Land Securities, why Retail Warehouses are always the first market segment to recover after a property recession. Sherwin answered: “Retail warehouses appeals to a wider variety of investors, have low tenant failure and we have seen some good news flow from dominant tenants in that sector recently. The improvement has been led mostly by small lot size deals.

“From solitary offers at the turn of the year, to now having several bids to choose from on assets for sale, this has fed through to improved pricing in the third quarter. Improvements in the number of banks willing to lend up to £50m has also helped. As a result, overseas investors, including sovereign wealth funds, as well as domestic institutional investors are coming back.” Retail capital growth was 2.1% over Q3.

Behind Retail, the Industrial sector’s capital growth over the third quarter was 1.5% – level with the all property average. Simon Jenkins, First Vice President of Development at ProLogis told delegates the return of the occupier market was the principal the cause for improvement. “We still, though, expect next year to be tough,” he cautioned.

Jenkins continued: “Occupiers are taking advantage of particularly good deals which the threat of empty rates has created – as landlords we have an even greater imputes to get tenants in, fuelling the move towards shorter and more flexible leases in the process. Yields, though, still need to come down further.”

UBS Portfolio Manager Sam Sananes explained the enduring popularity of central London and West End offices despite their volatility. He told delegates: “The weak sterling has driven overseas investors in – UK central London offices seem good value and there has always been an appetite for offices among that investor base. Domestic investors will more gradually start to show more interest as the rental story improves, which I expect it will.”

Commenting on the derivatives trading volumes ahead of the briefing Nick Scarles, Chairman of the IPF PDIG and Grosvenor’s Group Finance Director, said: "This quarter’s derivative volumes show a continuation of the gradual market recovery, both in absolute terms and relative to the level of direct property transactions. While the substantial reduction in the number of transactions has been balanced with an increase in average deal size, what stands out is a significantly increased market participation by end users."

This final sentiment was echoed by Deutsche Bank’s Senior Trader Charles Harris at the breakfast seminar. Harris told delegates: “End user activity has leapt up across the board. There are different rationales for trading now: from asset managers looking to rebalance portfolios, to investors seeking protection against further falls, while some will simply be looking for a quick property market exposure. We have hit the point now where those looking at the market and using derivatives outnumber those who are not looking and do not use the market.”

According to Alpha Beta Fund Management’s Founding Partner Robert Page, who also spoke at the briefing, there was an estimated £150 million worth of notional UK residential derivative contracts traded against the Halifax House Price Index over Q3. Page said: “To be able to buy PUT and call options on house prices will become increasingly useful for both debt markets as well as the wider real estate sector.”

The next opportunity to discuss the progress in global property derivatives will be at next year’s IPD Derivatives Conference at Thomson Reuters Building on February 25, 2010, while the wider direct property market will be debated at the annual IPD/IPF Property Investment Conference 2009 at Brighton The Grand Hotel.

The seminar also included a near bullish economic introduction by Ben Broadbent, UK Economist at Goldman Sachs who told delegates he expected the recent negative domestic GDP figures, which fell by 0.4% over Q3 according to the Office for National Statistics, would likely be revised upwards in the future to reveal that the UK economy has actually already returned to growth.

Broadbent told delegates: “Our guess is that the economy is in fact growing again and probably this started around mid-way through 2009.”

He continued: “Prior consumer boom did not rise as rapidly as many thought; it was government consumption. This will have to be slashed next year whoever wins the General Election. If the process is gradual, the exchange rate can take a lot of the strain – currency markets are already expecting a correction and, to aid a long-term recovery, we need a weak sterling.

“The key question facing all of us is: ‘Can banks finance investment growth as we come out of recession next year?’ Where small companies are trying to expand, will they be able to get finance?”

Source: IPD