This is the highest level since the bi-annual Commercial Property Confidence Monitor produced by Lloyds Bank Commercial Banking began in 2010 which also shows that over two thirds expect property values to rise over the next three to six months, with UK regions increasingly seeing the benefits alongside London.
Some 88% of fund managers and 90% of large businesses believe that overall market performance will continue to rise over the next three to six months. This compares to 46% and 38% respectively at the same stage last year.
However, while 82% of fund managers and 77% of major businesses claim an increase in the Bank of England’s base rate won’t change their intentions, the figure is much lower for SMEs at 65%.
One major element contributing to the overall rise in confidence is the view that property values are increasing. A significant majority of the respondents, 67%, are expecting property values to increase over the same period.
Fund managers and major businesses were once again the most bullish in this regard, with 92% and 90% expecting values to rise. Of fund managers, 34% expect a rise in values to be significant, which contrasts with just 10% in the Spring 2013 survey.
With confidence running high, 70% of fund managers will plan to make new investments followed by 50% of major businesses. However, this represents a modest dip on the Autumn 2013 survey when the figure for large firms stood at 63%.
‘The momentum seen in the market over the past 12 months shows no signs of slowing as we continue to see widespread improved confidence in our report. The market’s bullish attitude is perhaps best summed up by the reported indifference to a possible rise in interest rates, which could well happen in the next year to 18 months,’ said Marty Green, managing director of mid-markets real estate at Lloyds Bank Commercial Banking.
‘The apparent mismatch between a rise in values and slight decline in investment intentions draws attention to the situation on the ground we’re seeing today. UK based funds and investors are leaving London in search of better returns in the regional markets, particularly because of the on going influx of overseas capital into the South East,’ he added.
The latest report also asked respondents to list the differing funding sources used by their organisation. While still the most popular overall, mentioned by up to 50% of businesses, a wider range of funding mechanisms is now being used by businesses across the board, compared with August 2011. In particular, capital markets and private funding are now part of the funding mix for an increasing proportion of the market.
‘The question of funding sources reflects the shifting nature of real estate finance. Bank debt is decreasing as a share of the mix, particularly for larger businesses, which are looking more and more at the capital markets and other non-traditional sources of debt. This is why the role of banks is changing and why we at Lloyds Bank are shifting towards a distribution led model,’ said John Feeney, managing director of global corporates real estate at Lloyds Bank Commercial Banking.
‘In the UK market today there is both more debt and more equity to support the rising wave of optimism we’re seeing. The issue for investors now is the availability of stock and fierce competition for what is available. While this will help drive a revival in the UK regions and in secondary asset classes, it should also help to promote new development,’ he added.
Among the survey’s SME respondents, optimism was much greater among residential operators with 66% anticipating a rise in the performance of their portfolios, compared to 59% of their counterparts in commercial property.
‘At the smaller end of the market, our survey shows that attitudes are perhaps slightly less bullish than among the major firms and fund managers. This is typical with our previous surveys where SMEs typically lag the larger end of the sector on confidence, while being more pessimistic when respondents have predicted a downturn,’ explained Mark Ellis, managing director of SME real estate for Lloyds Bank Commercial Banking.
‘However, the overall net increase in their sentiment overall is testament to how well the wider market is performing and is evidence that the effects of growth are beginning to cascade down to SMEs. This is especially true in the regional markets,’ he added.
According to Pam Craddock, research director of the Investment Property Forum (IPF) which prepared the data, better news on the economic front has strengthened institutional investor confidence in UK real estate. ‘This is reflected in improved rental growth expectations across all commercial sectors in the near term, as indicated by the IPF’s quarterly survey of forecasts by independent property advisors and fund managers,’ she said.
‘The pressure to invest strong inflows of capital continues to drive up fund managers’ risk appetite and is likely to direct activity away from London and the south east. Assets in these markets are perceived to be over-priced relative to regional stock and offer little scope for further improvement, reinforced by a rising confidence in the occupational market outside London. Impending interest rate rises do not appear to dampen this current enthusiasm,’ she added.
