The twice yearly Commercial Property Confidence Monitor, which surveys of 500 real estate professionals shows positive sentiment has reached its highest level since the research began in 2010 with Scottish businesses and fund managers leading the way at 90%.
Some 88% of fund managers expect the values of their assets to increase over the next three to six months compared to just 10% at the same point last year with 80% of major businesses agreeing and 63% of major businesses plan to increase their investment commitments over the same period.
Lloyds says that it is the beginning of a regional recovery in the UK commercial property sector with Scotland seeing the biggest turnaround in market confidence among its small and mid sized firms. The 90% anticipating an increase in market activity is in stark contrast to the 9% recorded at the same point in 2012.
The South West followed with 86% then the North West at 77% and the Midlands at 75%.
‘We are seeing our London based mid market investors and developers actively looking to grow and they are largely having tangible success. Outside London is quite a different story and many quality assets are trading in the regions to London and internationally based funds and major investors,’ said Marty Green, managing director of mid-markets corporate real estate at Lloyds Bank Commercial Banking.
‘In larger cities across the UK, local investors and developers, whilst talking more positively, are remaining cautious and focussing on pre-commitment, which is improving with some signs of step change, but is best described as subdued,’ he added.
All four groups of businesses surveyed by Lloyds Bank believe that activity will increase over the next three to six months, with positive responses at 90% amongst fund managers, the highest level since the survey began in 2010
This growing optimism, which was first identified in the previous CPCM report in April 2013, could have a tangible impact on portfolio performance, with both fund managers and major businesses signaling a significant shift in attitudes.
An overwhelming majority, some 88%, of fund managers expect their assets to increase in value over the coming months, compared to a figure of just 10% at the same time last year.
Among major businesses, 80% expect the same, with 63% planning to increase their investment commitments over the next three to six months.
‘The UK market in 2013 has been stronger than many expected it to be. It’s becoming an increasingly competitive environment for developers and investors as well as the banks,’ said John Feeney, global head of corporate real estate at Lloyds Bank Commercial Banking.
‘The huge upswing in confidence among fund managers in the past year is perhaps the most significant bellwether yet of the market’s recovery and, with a majority of this cohort and large businesses looking to invest more, the momentum is continuing to gather pace,’ he explained.
The view among the sector’s smaller businesses was also markedly similar to those at the top end of the market, according to the latest CPCM, with 69% of small and mid market enterprises (SMEs) in the commercial property sector expecting their area of the industry to improve.
Within the small and mid-market residential market, 59% expect their portfolios to perform better over the next three to six months and 51% of all small and mid market businesses expect the value of their assets to increase.
‘The recovery has now started to trickle down from the sector’s major players with SMEs now catching the infectious confidence flowing from the top end of the market and London,’ said Mark Ellis, head of property, SME Banking, Lloyds Banking Group.
‘This has been reflected in our own activity as a group in the sector, which in volume terms has been weighted towards the SME market this year. We expect further growth in our loan book in 2014,’ he pointed out.
In addition to its regular questions on confidence and intentions, the latest CPCM report also included a number of topical questions covering contemporary market issues.
Responding to a question around factors that could threaten the real estate sector’s recovery in the UK regions, local planning policy was cited as the biggest concern for small and mid-market businesses, and second for major businesses who have UK corporate uncertainty at the top of their list.
Fund managers see a lack of capacity to facilitate growth and job contraction in the regions as the main threats.
‘Our clients tell us that while the National Planning Policy Framework has done a great deal to correct the errors of the past, it can still be unnecessarily cumbersome. Confidence is such an important factor in the market, so with sentiment now stronger than it ever has been since we started the CPCM research it’s important that any possible barriers to growth are examined carefully,’ said Green.
Alan Patterson, chairman of the IPF research steering group and global head of research and strategy at AXA Real Estate, said that the improved optimism demonstrated by fund managers earlier in the year has continued to strengthen, probably as a result of the dramatic recovery in the UK economy in recent months.
‘The emphasis placed on management suggests lingering concerns in the occupational market outlook, but the IPF’s latest quarterly survey of UK commercial property forecasts from both advisors and fund managers indicate some rental growth emerging in the current year,’ he explained.
‘Strong capital inflows and new fund launches, together with a willingness of investors to accept higher risks, will drive managers to look to good regional stock in order to provide better returns, and certainly higher yields, than might be obtainable from prime and core central London and south east property,’ he added.
The research also shows London, Manchester and Birmingham were cited as the top three destinations for investment over the coming six to 12 months. All groups predict a boost to residential and commercial investment in the UK as a result of the new high speed rail link between London and Birmingham.
