EPRA INSIGHT It's not ‘five to midnight’ for listed property

Despite some apocalyptic forecasts and much waving of red flags, It's not ‘five to midnight’ for the listed property sector and the current strong cycle is not about to end, according to Bart Gysens, head of property research at Morgan Stanley.

‘2016 will be less spectacular than 2015, but it will not be bad, especially for London offices,’ Gysens told EPRA Insight, a conference in London organised by the European Public Real Estate Association.

It is true that the classic risk indicators are all present, from all-time-low property yields to all-time-high property deal volumes, from high levels of ECM and M&A activity by companies to record generalist investor interest. But there is one important mitigating factor. The last three major property corrections, Gysens pointed out, (in 1975, 1992 and 2009), happened after years of elevated property lending. ‘We are far from that now,’ he said. ‘Property is not hooked on credit, far from it. UK commercial real estate lending is 6% of total bank lending, much lower than it has been in the past.’

Rents and risks
Another positive is rental growth, particularly in the London office market. Availability, the lead driver of rental growth, is very low, and the consensus view is that demand will remain high and vacancy rates will stay low. ‘We expect high single-digit office rental growth in London, around 8%,’ said Gysens. ‘We see office capital growth of about 6% and yields softening by about 10bp.’

There are two risks on the horizon: the first is a fall in demand due to ‘Brexit’, a UK vote to leave the European Union in the referendum which is likely to be held in the second half of the year. The second is continuing weakness on the London Stock Exchange. ‘The FTSE 100 index has been a good lead indicator for City office rents, so the fall in equity markets in sapping confidence in the property market, which is a negative,’ said Gysens. ‘Currently the stock market points to 5% NAV decline in the first half of 2016, which we think is far too bearish.’