Property is set to continue outperforming equities and bonds in 2003, despite its strong run over th...
Property is set to continue outperforming equities and bonds in 2003, despite its strong run over the past 18 months.
Although UK investor interest has pushed down domestic property yields and rental growth, economic recovery is expected to boost the commercial property sector, which has been stagnating over the past three years.
Alex Watt, managing director of Standard Life Property Investments, remains bullish about the domestic commercial property sector, saying it is attractive in terms of yield premium over bonds in the current interest rate environment.
The asset class is some way off its mid-1993 peak, giving scope for yield growth. He says: 'Given that commercial property has not experienced a repeat of the overbuilding in the last cycle, investors recognise the asset class as capable of delivering positive returns over the medium term.'
Michael Prew, a property sector analyst at SchroderSalomonSmithBarney, believes respective performance of the three largest UK property companies, British Land, Canary Wharf and Land Securities, has converged over the calendar year, although their business models are now diverging.
He says the performance of Canary Wharf's portfolio and its ability to acquire new adjacent land through innovative financing deals have exceeded expectations. However, the lack of diversity in its portfolio and downward rental pressures in the Canary Wharf complex have led Prew to underweight the stock.
Prew says: 'We expect headline rental values to reduce at least 5% in the year to June 2003, hitting the reversionary potential and valuation assumptions.' He adds British Land is too reliant on the huge Meadowhall and Broadgate complexes, and the latter is exposed to falling City rents. Moreover, the group is highly geared and lacks any clear management succession plan, he adds.
Watt shares Prew's concerns, pointing to out-of-town shopping centres as stronger growth areas. As demand for these sites continues to increase, units are starting to fetch a premium as a result of more stringent council planning permission criteria, as local authorities look to safeguard the interests of city centre high streets.
Watt notes: 'The outlook continues to be bright for out-of-town retailing as the result of a combination of restricted supply enforced by planning regulations and strong retailer interest in expanding floor space.'
Prew prefers Land Securities, which he believes is a lower risk investment because of its low levels of gearing and developments in the rich Kent Thames belt.
Watt is bullish on European property. Headline rent figures are coming down, but he says these figures are skewed by a small number of large transactions.
'Property values did not rise to reflect the peak level of these marginal rents and so have not had to adjust to the rental decline. As a result, despite negative market sentiment and a slower pace of demand, overall portfolio values have remained robust over the past 12 to 18 months,' Watt says. 'As growth in the European economies picks up, the aggregate property rental market should get some stimulus and provide support for further capital value growth.'
Property to continue to outperform equities.
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