Henderson Think/UK Series: Can the Surge in Pricing be Maintained in 2010?

Banks will have an important role to play in the pricing of assets in 2010 and, while the market turnaround may bring forward planned disposals and a more hard line approach is expected for more poorly performing managers, Henderson does not expect to see a flood of assets brought to the market, especially not of the quality stock currently in demand.

A lack of stock is expected to affect the two-tier market that developed in late 2009, driven by huge demand for prime, well-let stock with long and secure income streams. This is likely to give way to a three or even four tier market given the scarcity of investment stock, depending on how far investors are tempted up the risk curve. There is already evidence of risk-taking on shorter lease income provided the product is of high quality and well located.

The more aggressively that prices correct in the short term, the greater the concern over whether the UK
market will experience a pricing wobble, as investor confidence, sparked by the rebound in equity markets, wanes reflecting the underlying weakness of the UK economy. As such, the economic backdrop will become increasingly critical, especially if the UK experiences anything other than an orderly rise in interest rates and bond yields. The ability of the government, whoever is in parliament post general election, to address the burgeoning current account deficit and restore investor confidence will be pivotal.

Mike Keogh, Research Manager at Henderson said: “Over 2010, UK All Property returns are likely to hit
double figures in 2010, largely driven by a continued rally in the first half caused by lack of investor stock
and the weight of money entering the market. Barring a serious relapse in economic confidence, we expect the UK market to experience a pause in the medium term positive yield correction from the end of 2010.

This stabilisation in yields, or even slight fall in values across non prime assets where occupier threats
have materialised, is likely to produce relatively modest returns in 2011.

“The principle of timing and the quality and volume of assets available in the market over 2010 is therefore key. The medium term picture however, remains healthy, supported by an improvement in the underlying economic picture. As such, UK property remains a good buy, and buoyed by a higher income return, we expect the market to deliver an annualised 5 year return of 10% pa between 2010 and 2014.”

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