EPRA meeting signals a bull market in the UK

The UK property market is set for a bumper year in 2015, delegates at EPRA’s London Insight Conference heard last week.

The UK currently presents the best investment prospects for commercial real estate in Europe this year, ahead of Germany, Ireland and Sweden, according to James Wilkinson, European chief investment officer for global real estate securities at Blackrock.

BULL MARKET
'We are in the midst of a bull market. I'm tempted to say we have never had it so good because of the low borrowing costs and the high level of capital flowing into property’s equity and debt markets.'

Prospects of strong rental growth and rising asset values in the UK commercial real estate market mean investors should 'enjoy it while it lasts,' said Exane BNP Paribas analyst Nick Webb.

Webb’s analysis was echoed in a panel discussion led by Harm Meijer, managing director of Nexstep Advisory, during which there was general agreement that commercial property in the UK would probably generate total returns of around 15% this year.

His fellow panelists were the chief executives of the listed companies Great Portland Estates, Hammerson and Unite, who spoke about the positive prospects for their own businesses.

Exane BNP’s Webb predicted that weaker oil prices and higher real wages would boost consumer spending, giving momentum to the UK’s economic recovery and employment growth. Negligible or falling inflation has pushed back prospects for higher benchmark interest rates, which may not occur until the second half of the year, he said.

'Demand for space is accelerating, so landlords have pricing power,' he said, predicting that the inflation outlook means that average rents may rise at the strongest rate since 1989, compressing property yields and supporting net asset value gains for listed property companies.

Toby Courtauld, CEO of central London developer Great Portland Estates, picked up the theme, saying 'I wouldn’t be at all surprised to see double-digit rental growth' in the West End office market after three or more years of employment growth in the capital and an acute shortage of new space. He predicted total returns of 15-19% this year, mainly from higher rents market as average property yields stabilise.

RETAIL
David Atkins, CEO of Hammerson, addressed concerns about the retail sector because of cyclical and structural pressures caused by e-commerce, saying that destination locations remain a magnet for shoppers. He pointed to solid weekly sales for tenants at Hammerson’s prime shopping centres and double-digit growth in retail sales and rents at European outlet centres, which is why the sector is a favoured investment theme for Hammerson, he said.

'The threats from the internet are behind us,’ he said, pointing to the high level of in-store collections of goods purchased online from the John Lewis partnership. It demonstrates that 'people are questioning if online only is the right approach' to doing their shopping, he said.

The rental growth theme was also reprised by Unite CEO Mark Allan, who outlined how a 12% increase in student numbers in the next three years will put pressure on accommodation in regional universities outside London. This stems from the scheduled end to the cap in student numbers for British universities in September, which will benefit mainly those establishments in the middle of the academic rankings, he said.

Allan predicted that the student accommodation sector’s attractive prospects will drive up values at a time when about 20% of stock in the UK is changing hands, as private equity owners sell their holdings. He predicted that yields may fall by 50 basis points this year.

When asked about risks to the positive outlook the panelists were not unduly concerned about the fallout from May’s general election, while Blackrock’s Wilkinson flagged that problems in the Eurozone might act as an external shock. None of the three CEOs is focusing on making purchases as a priority as they anticipate an end to the current property cycle with a turning point occurring perhaps in the next two years or so. Their focus is to either sell mature assets or to build out their development pipeline.

EPRA’s London Insight Conference was sponsored by law firm Nabarro and held for the second year in succession in the lecture hall of the British Museum.