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Major investor optimism in UK commercial property increasing

There are glimmers of hope in several UK locations, says the latest Commercial Property Confidence Monitor for Lloyds Bank Corporate Markets and investment intentions among major property businesses are at their highest since the survey began.

But fund managers and advisers herald a note of caution as retail business failures and economic factors cloud the horizon.

The survey reveals a two tier UK market focused firmly on London and the South East, with investment fuelled by equity funding. But, there are some signs that investors may turn to regional markets for value growth and that greater acceptance of alternative funding could unlock opportunities nationwide.
Confidence in the UK commercial property market remains stable, according to the report, and while there is continued uplift in sentiment, this is now at low levels compared to a year ago.
Confidence is strongest among major businesses, 82% of which intend to increase their exposure to property in the next three to six months, the highest level recorded since the Commercial Property Confidence Monitor was launched. Confidence is also biased towards London.
Against this backdrop, Lloyds Bank Corporate Markets polled its quarterly survey sample of 449 financial decision makers across the property world on the sources of funding they expect to use in the next 6 to 12 months. Less than half, 46%, of medium/large businesses and a similar proportion of fund managers say they would use bank debt to fund their investments. This rises to almost two thirds, 65%, for major businesses but only around a quarter, 27%, for small businesses.
More than a quarter, 28%, of medium/large businesses mention their own equity, third party equity or cash reserves as their first preference for funding, together with a third, 32%, of fund managers, around a quarter, 24%, of major businesses and two fifths, 41%, of small businesses.
‘This represents a fundamental shift in the dynamics of property funding. Three years ago we would have expected 80 to 90% of the market to be relying on bank lending. While we continue to lend on property, investors are increasingly using equity to allow them to execute deals quickly and with certainty, often with a view to securing the right funding solution later,’ said Lynda Shillaw, Lloyds Bank Corporate Markets’ managing director of Corporate Real Estate.

Beyond debt and equity, the survey revealed a small appetite for alternative forms of funding via capital markets and other methods, although these are mentioned as first options by fewer than one in ten, 11%, of all respondents.

‘We believe the far smaller appetite for funding solutions beyond bank debt and equity reflects to some extent, a lack of awareness in the market generally about the alternatives available to property investors as prior to the financial crisis there was no shortage of cheap bank finance,’ explained Shillaw.

‘If properly advised and as the debt capital markets open, investors can consider a number of funding solutions to unlock investment and refinancing opportunities and we have seen activity in 2011 in the European bond markets, the US Private Placement (USPP) market and Commercial Mortgage Backed Securities (CMBS). As customers become less reliant on single-source bank borrowing, banks themselves have a role to play in working with clients and developing products that deliver the right funding solution,’ she added.
When asked where they would invest outside London for the greatest gains in the next two to three, the South East was mentioned most frequently by between 26% and 41% of businesses depending on size and by 58% of fund managers. The Midlands was the next most popular investment location, mentioned as a first choice by 18% of major businesses and 13% of medium and large businesses. Small businesses voted the North West their first choice for investment outside London and the South East.
Around a quarter of major businesses, 11% of medium and large businesses and 18% of small business said they would only invest in London.

‘The preference for London and the South East is not surprising, as these markets are considered safe havens for global investors in an unstable world economy. London is characterised by limited supply of prime property and a weight of overseas money looking for a home,’ said Shillaw.

‘Outside the South East, investors are generally holding back but our findings suggest some appetite for new investment. We would expect this to be focused on those high quality assets that are let to good covenants, or good quality secondary assets that present an opportunity to create value, rather than region-wide trends,’ she added.
The house building sector was cited by more than a quarter, 26%, of medium/large investors as the sector that will perform best in the next three to six months, a higher vote of confidence than they gave any other property sector. This preference was even higher among medium/large London businesses at 30%, while 22% of small businesses and 29% of major businesses also shared this view.
Office investments were cited as the likely top performer among 50% of fund managers and by more than a third, 35%, of major businesses. In contrast, property advisers tipped out of town retail as the best performer in the coming months (23%).