UK - Asset quality - not lease length - should be the primary indicator of value for UK property, according to Robin Martin, head of performance analysis and research at Legal & General Property.
In a briefing on Wednesday he attributed the fund manager's outperformance in 2009 to its focus on asset quality while other investors downgraded placed a premium on security of income.
"Longer leases suggest stability but shorter leases can offer greater opportunities for cashflow growth in future," he said. "The market is subjective about what counts as prime. It's completely irrational and you can often play that. A year ago, prime was a 25-year lease to Tesco."
Martin forecast there would be no bounce back in construction for the next few years, predicting a future shortage of grade-A prime assets. As the funding shortage continued to hold back the development pipeline, he identified development projects as an opportunity for investors willing to take on risk.
Meanwhile, he said higher-risk assets would see a period of outperformance, but a tepid recovery would mean there was no substitute for stock picking. "Taking risk will be the source of outperformance in 2010 and beyond - but it needs to be selective," he said.
Despite the current generalised risk-aversion in the market, Martin predicted a modest recovery in risk appetite in 2010—2011. "There's an interesting story about what's happening at portfolio level. There's a growing difference between the best and the worst portfolios," he said, pointing to exposure to vacancies of the key differentiator.
Marting added that the Greek economic crisis could spur interest in real estate generally, and the UK market specifically, as Greek investors sought to pull capital out of their domestic market.
