There has been a slight tapering in confidence after nearly two years of consistent growth in optimism and fewer property professionals expect investment to increase but around 60% of UK investors believe foreign investment has had positive impact.
Increasing numbers expect activity to stabilise and the North West and London based smaller sized operators are more confident about the future, according to the latest confidence survey of real estate professionals by Lloyds Bank Commercial in association with the Investment Property Forum (IPF).
Further analysis revealed that nearly73% of larger sized businesses surveyed and 70% of fund managers agreed, though this figure dipped to 60% amongst SME respondents.
Given the increased level of foreign investment into this sector, a significant minority, at least 17%, of all respondents said that they had changed their business investment activity as a result of the influx of overseas capital. In particular 42% of fund managers and 30% of larger sized businesses stated that they have altered their business investment plans due to this influx.
‘For many regional commercial property operators the influx of foreign capital has widened the range of exit options and shifted focus away from UK institutional buyers,’ said John Feeney, global head of commercial real estate at Lloyds Bank Commercial Banking.
‘'Further a variety of foreign buyers are now active in regional UK markets including sovereign buyers seeking stabilised assets and more opportunistic investors willing to take asset management risk,’ he added.
The latest survey also indicates that confidence in the UK’s commercial property market remains high, with over 60% of respondents believing that activity will continue to increase over the next three to six months.
However, an increasing number believe that the market will level out. Around 25% to 36% of respondents now expect activity to remain at current levels for the next three to six months which compares to just under 20% in the CPCM’s last report in April.
In line with a slight softening in confidence, the report suggests that prices will begin to stabilise as well. In the Spring 2014 CPCM only 3% of major businesses said prices would stay the same compared to 30% in this latest survey.
Investment activity also looks set to increase, with fund managers reporting a slight increase in their investment intentions, rising from 70% to 72%, as did major businesses, with 53% planning to spend compared to 50% in April.
‘The UK’s market has soaked up a lot of capital over a short period of time and some investors, such as private equity funds, are turning their attention to the nascent investment market recovery in certain Eurozone countries particularly in the periphery,’ said Feeney.
‘The UK market is further advanced in the recovery and so our latest CPCM reflects a tempering of enthusiasm and the return of more normal levels of activity. Confidence still remains far higher by 55 index points for businesses and 94 points for fund managers than at the same stage two years ago,’ he pointed out.
For the CPCM’s SME respondents, confidence overall remained high with 64% expecting market activity to improve during the next three to six months. But having peaked at 80% in April, UK market optimism saw the greatest drop among small firms.
The picture differed between regions. At the time of the survey, which took place before the Scottish referendum, those expecting a market upturn in Scotland fell from 80% in April to 67%. London and North West-based SMEs were more confident about their own prospects over the next three to six months than of the market in general.
While most regions reported a slight softening in sector activity confidence, small firms from the North West were now more confident in this regard than they were in the previous report, while in the capital a greater number of its SME property firms expect the performance of their portfolios to improve than did earlier this year.
‘Confidence remains high across the UK, particularly when SMEs consider their own business prospects. However, in Scotland there are signs that political uncertainty had an impact on those responding to our survey. With the referendum now concluded we'd expect optimism to increase,’ said Mark Ellis, managing director of SME real estate for Lloyds Bank Commercial Banking.
‘London continues to buck the trend, however, as does the North West. Both markets have had incredibly strong years so far with occupier and investment activity continuing to rise. It’s reasonable to see more capacity for growth in each too, particularly in the North West which is still edging past its pre-crisis peak,’ he explained.
According to Alan Patterson, chair of the Research Steering Group at the Investment Property Forum, the weakening in fund manager sentiment is not entirely surprising, and can be attributed to a combination of factors.
‘Some investors perceive risks to be increasing with a possible rise in interest rates approaching even if economic growth is expected to be good. This is likely to be concerning domestic managers searching for value against the historically low yields being paid in the highly competitive central London and South East markets,’ he said.
‘Globally, growth is slowing, with fears of stagnation, although that does not seem to have affected the strong inward capital flows, which is continuing to drive demand for product at the prime or secure end of the market, an area that many domestic players feel priced out of,’ he added.
