Releasing the results of its half-yearly systemic risk survey, the Bank said that while, fewer respondents (61%, down 6 percentage points since October 2013, ) were concerned about the possibility of an economic downturn in the country, 40% were worried about falling house prices.
But, while investors are increasingly wary of residential property, particularly in London, many are rather bullish on the property sector more broadly.
According to the Investment Management Association, net retail sales into the property market came in at £446m in April, the highest since 2009 and second only to the UK equity income sector.
Guy Glover, manager of the F&C UK Property Fund, said he has seen a real “sea-change” in interest in the property market over the past 12 months.
Part of the reason for this is that property continues to provide a good yield in a world where income is hard to find.
“From an income perspective, you are seeing an average all-in yield of around 6% from property. And, importantly, you are seeing capital growth return to the market,” Glover said.
“Between 2007 and 2009, property values fell around 44%. Currently, while capital values have risen and are now about 22% above the trough, they remain around 30% below the 2007 peak,” he added.
The macro view
While the income attributes are attractive, there is also a strong argument to be made for the sector from a fundamental perspective.
As Marcus Phayre-Mudge, manager of the TR Property Trust explains, there are two things that kill property markets: too much debt in the wrong hands and too much development.
While he was quick to add that one can’t say that “this time it is different”, with regards debt financing and property, he pointed out that the calamities of 2007 and 2008 remain very fresh in the mind.
“If anything, banks are currently too cautious” he said, adding: “That is evident from the measures Mario Draghi unveiled last week in a bid to stimulate the credit transmission mechanism in Europe.”
But, he said: “We are not basing our view of future property returns on bank lending ability.”
“There is remains sustained interest from overseas as well as growing interest from the institutional market. And, continued demand, especially for prime stock. While, in terms of supply, there has been a significant lack of new development has not been fully appreciated by the market.”
Both in the UK and, in Europe more broadly, he explained, we are coming out of a very depressed, very difficult period and, as a result, there has been no new development for some time. This is beginning to feed into vacancy rates, which are heading toward all-time lows.
How to play it
Chris Kitchenham, executive director at Walker Crips said he really likes property at the moment and has just upped the group’s exposure to the asset class in the UK. But, he said, he prefers closed-ended vehicles as it means the manager in question doesn’t need to worry about providing daily liquidity and, importantly, it means he or she can be fully invested, rather than being forced to hold a percentage of the funds in cash.
One of the vehicles he is particularly excited about is the Tritax Big Box REIT, which invests in large logistics assets in the UK.
“It is really a macroeconomic play on a change in consumer behaviour; people are increasingly shopping online, which means big distribution centres are becoming more important.”
Glover too is finding value in such assets, but says, the important thing for him as the manager of a bricks and mortar fund is to find buildings in strong locations, with the potential for rebased rents.
As a house, more generally, F&C believes that, while there remain risks in parts of the property market, the outlook as a whole for commercial property “seems more positive than for many years”.
It said, it expects central London to continue to out-perform, but believes the core will expand to embrace other parts of the capital.
But, it added: “The upturn is expected to be most pronounced in areas with a strong employment base in thriving industries. This includes the Thames Valley and micro-economies such as Aberdeen and Cambridge.”
According to Phayre-Mudge, other areas in which he is interested are budget accommodation, student accommodation and self-storage units, which he says will benefit from the expected rise in property turnover levels.
“You are also likely to see a significant increase in land values in the regions because the UK simply does not have enough houses at the moment, and there is no way the government is going to try and slow down the pace of house building,” he said.
There is clearly a bullish case to be argued for certain parts of the property market in the UK, but what happens if expectations for UK growth don’t come in as high as expected?
There is, of course a risk that rents don’t rise as much as expected, and, in a downturn risk assets will underperform, but perhaps the bigger risk lies in growth coming in higher than expected and interest rates rising faster than predicted.
According to Phayre-Mudge even if rates do rise, it is likely that they will remain below long-term historical averages, instead staying in the 2% to 3% range, which is unlikely to change the picture painted too much.
And, of course, much of that is predicated on one's view of how sustainable the run in GDP growth is. Indeed, the only thing one can say for certain is that people seem to be about as bullish on the prospects for parts of the commercial property market as they are concerned about the frothy nature of house prices in the capital.
