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23rd June 2017
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Soapbox: How will the property sector fare over the coming months?
Matrix's real estate research team shares its predictions for the future of the UK property market, which in turn will influence the KBB industry
Everyone is in agreement that the next year is going to be tough for the UK economy; but how will the property sector fare?
In theory, low interest rates should help, and on a relative basis, property looks an attractive asset class. However, until confidence returns and there is evidence of widespread rental growth, valuations are unlikely to move anywhere quickly.
For the 13 companies analysed for the purposes of this report, we have a three-year net asset value compound annual growth rate of 6%, in line with the long-term average and showing a slowdown next year but a pick-up in 2012.
We have seen capital growth of 15.8% since July 2009 across all sectors and types of property, but from here we believe any growth will be more selective and focused on prime (not just in terms of location and buildings but, most importantly, the type of property in demand by occupiers). The low-interest rate environment makes returns from property look relatively attractive, and while we accept economic uncertainties will mean a quiet 2011, we forecast stronger growth in 2012.
The occupational market is supply constrained in almost all sectors after the development tap was turned off, so there is going to be a squeeze on rents at some point, the time-determining factor being demand. Understandably, tenants are cautious at the moment and therefore we anticipate the real push in rents not starting until 2012 - but it is on the way.
Year-to-date the FTSE Real Estate sector has moved little, underperforming both the FTSE All Share and the broader EPRA indices. In terms of stock picks, not surprisingly the central London players have done relatively well, as have some of the specialist retail plays.
Issues that will influence the real estate sector include: only average NAV growth prospects; low interest rates; unexciting dividend growth; limited corporate activity; continued questions over REIT strategies; and the marking to market of debt, highlighting the relatively high balance sheet cost of debt.
In calculating our target prices, we have taken the view that, in November 2011, investors will have a more positive outlook on both the economy and the prospects for the real estate market. This assumes that any double dip is not prolonged. However, within the next six months, we do expect some volatility.
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3rd December 2010