As investor sentiment towards UK property surges on the basis of improved fundamentals, LGP says that the valuation case remains intact.
23 September 2013
In today’s Market Differentials briefing, Legal & General Property’s (LGP) research team highlights the improvement in economic momentum and increasing availability of credit, both of which have outstripped expectations.
UK economic data have been surprising on the upside and Legal & General Investment Management (LGIM) is projecting UK GDP growth to be 2.4% in 2014, close to the trend rate of growth in the economy. Crucially, this is now feeding into stronger tenant demand and increases in prime rents, which we expect to translate into an uptick in rental values across the wider commercial property market in the coming quarters.
In recent months we have seen an accelerating thaw in commercial real estate lending conditions, with a greater number of lenders extending terms on a wider pool of assets. Whilst LGP is not pointing to a debt-fuelled recovery in values, this does increase the number of financial options available to investors and support investment demand across the risk spectrum.
The improvement in domestic investor demand has had the greatest impact on returns outside London. Valuations for regional assets were stable for the first time in two years in Q2 2013. There is a strong tailwind behind the capital growth performance of the IPD market indices in the second half of 2013. The LGP view is that total returns for calendar 2013 are likely to be in the range of 8-10%, with upside risk against this.
Rob Martin, Director of Research at Legal & General Property, comments: “At the start of 2013, LGP highlighted a robust valuation case for commercial property as an asset class and that remains the case now. Despite the increase in UK gilt yields in recent months, property yields remain above average on virtually all of the measures we use to assess relative value.
“It is encouraging to report that the positive fundamentals are now translating into improving returns for UK commercial property. But we are still living with the effects of the global financial crisis and the normalisation of economic and financial conditions will continue to present challenges. With this in mind, we believe that consistent outperformance in property will require a blend of strategic clarity, rigorous stock selection and deal making flair.”
Notes to editors
Legal & General Property
Legal & General Property (LGP) is a wholly-owned subsidiary of Legal & General Investment Management (LGIM), one of Europe’s largest institutional asset managers and a major global investor. LGIM manages approximately £433bn in assets on behalf of more than 3,100 clients (30 June 2013) and provides products and solutions spanning all asset classes. LGP is the third largest institutional property fund manager in the UK, managing or co-managing 16 separate funds or vehicles and two segregated mandates with an aggregate asset value of £11bn as at 30 June 2013. These funds include:
Specialist Pooled Funds
The Leisure Fund Limited Partnership; Industrial Property Investment Fund; Arlington Business Parks Partnership; and the English Cities Fund
Single Asset Vehicles
Bracknell Regeneration Partnership; Central Saint Giles Partnership; Performance Retail Limited Partnership and Warrington Retail Limited Partnership
Life Fund; Linked Pensions; Linked Life; Managed Fund; Property Unit Trust; UK Property Income Fund; LPI Income Property Fund and the Hybrid Property Fund.
LGP’s UK-focused fund management platform has built and retained a strong track record of out-performance across the sector. Owing to its size, diversity and penetration, it benefits from best in class banking and property industry contacts which, along with its wealth of in-house skill and expertise, have enabled it to continue to attract and secure high quality market opportunities. Taking a client-centric approach, the business places the highest priority upon integrity and transparency, leveraging upon the significant resources provided by the wider LGIM platform. Sector specialists cover each sphere of the market and are supported by LGP’s market-leading research capability. LGP’s sector specialisms cross all facets of the real estate market. In particular, the Company has a major development platform, responsible for delivering West End landmark building, Central Saint Giles, and Agar Street, its high profile Covent Garden office scheme, amongst others, and is currently involved in bringing forward a number of significant town-centre retail and leisure regeneration projects, including Bracknell, Trowbridge, Northampton and Eastbourne.
Legal & General Property Limited. Registered address: One Coleman Street, London EC2R 5AA. Registered in England 2091897.
For more information please contact:
PR Manager, Legal & General Capital and Real Assets, LGIM (Property, infrastructure and alternative finance)
t: + 44 (0) 203 124 2777
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About Legal & General
Legal & General Property Limited.
One Coleman Street
London EC2R 5AA.
Registered in England 2091897.