Commercial insurance article archive
Property stocks feel the pain
UK property stocks have been falling steadily in recent times and the market is bracing itself for further downturns ahead of this month's Real Estate Investment Trust (Reit) figures.
The latest European Real Estate Securities Quarterly Review pegged UK property stock losses at 9.8 per cent in Q3, while Investment Property Databank recorded the weakest monthly performance for property capital values in 17 years - falling 1.6 per cent in September.
Though speculation of overselling saw this week's interim reports notching up minor gains for UK property investors such as Great Portland Estates (up 19p to 535p) and British Land (up 17p to 960p), the overall outlook remains gloomy and many analysts are cautioning that the cyclical downturn has only just begun.
An ongoing credit crunch is one major factor bearing down on the market, with many of the capital-intensive demands of nascent commercial developments suffering from the shortage of liquid money as well as a stubbornly high 5.75 per cent interest rate.
Furthermore, on top of the scarcity of credit and the fact that interest rates have risen five times since last summer, real estate groups are also struggling to negotiate the minefield that is property valuation.
While the majority of analysts now concede that house prices face a dramatic slowdown in 2008 - having tripled in value in just one decade to the current national average of £172,065 - many still point to the pulling power of high-end property in London and a chronic shortage of UK housing stock.
And the uncertainty over property valuation is made even more precarious by the antagonistic demands of fund managers and brokers. While the former are understandably wary of investors fleeing if valuations falls too quickly, brokers and agents are pushing for sharp price corrections in order to generate business in the sluggish market.
Alongside these difficulties, warning signals have also been sounding over the capital reserves of UK Reits - collective investments trusts which pool various investors' money into diverse property portfolios.
Lehman Brothers' property analyst Mike Prew this week told Reuters that many Reits may be forced into selling off some assets and reducing expansion plans by as much as 50 per cent due primarily to credit-based pressures on capital reserves.
"With the equity market shut, debt facilities tightening and permafrost in the investment market, Reits have to worry more about sourcing capital than asset value preservation," Mr Prew told the news agency.
He added that rising real estate debt masked flagging market confidence in the future of UK property - particularly given disturbing parallels with the more advanced US downturn - and that the bearish market had already begun shielding itself from potential risk by reigning in activity.
The worst case scenario given by corporate broker Cazenove predicts an incredible 32 per cent fall for UK property majors, with price targets for Hammerson down from 1510 to 980p and Land Securities down 2100p to 1400p.
But while a tumbling US market - coupled with a recent warning from the IMF that UK property is overvalued by 40 per cent - will doubtless unsettle some investors, others predict a soft landing and quick recovery for the market.
LaSalle Investment Management for one has argued that even with more modest targets for the coming years, well-managed property firms remain in a prime position to capitalise on demand and outperform traditional property assets.
"Although risks remain, we believe that many companies are valued at deep discounts to their private market value and/or are being given too little credit for their future potential," explained Ernst-Jan de Leeuw, head of European securities and portfolio manager at the firm.
"Overall, European real estate securities will continue to benefit from strong fundaments along with the expansion of Reits and a number of potential European property IPO's (Initial Public Offerings) set to come to market over the next few months."
Greater transparency following on from the US crisis will also likely mean that investor confidence rebounds quicker than in previous times, while some analysts have even suggested that occasional downwards adjustments could be beneficial to the market as regular fluctuations minimise the risk of stalemates developing between price-sceptical buyers and sellers.
"There is so much more information, analysis and understanding of what is happening than in the past," William Newsom, head of UK valuations at property services firm Savills explained to Reuters. "So there's going to be a much quicker acceptance of a new level of value."
16 Nov 2007
