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        The Lloyds Bank Commercial Banking Commercial Property Confidence Monitor is the only survey of its type to provide a representative and regular view of confidence amongst financial decision makers in the UK commercial property market. Now in its eleventh quarterly wave, the survey takes into account the opinions of principals (housebuilders, developers and investors) and advisors (agents, surveyors and consultants), in small, medium to large and major property businesses across the country. Courtesy of the Investment Property Forum, the sample also includes the views of property fund managers.

         

        The study, which is closely monitored by the real estate market, provides a snapshot of changing confidence levels across the sector and takes account of respondents’ views about their own business performance, as well as prospects for values and investment levels over the coming months, to give the most accurate picture available of current sentiment within the property industry.

         

        Although confidence levels remain generally below the levels seen at this time last year, in the last quarter the monitor has shown us confidence in the UK commercial property market has improved. The negativity that we saw in the previous two quarter’s appears to be stabilising for now. The intention to invest that we see in this survey indicates that respondents are anticipating undervalued assets presenting good value creation opportunities through active asset management coming to the market.

       
     
    • At a glance April 2012
     

    • latest summary of results


      CONFIDENCE INDEX

       

      After a sharp dip in November for most, February’s overall confidence index shows the return of muted optimism.

       

      However, confidence levels remain generally below those seen at this time last year, especially for fund managers and major businesses. Small businesses and medium to large advisors have shown the greatest net recovery in their overall index in the last quarter, each improving by 25 points. Medium to large London businesses show the smallest change at +6.


      Evidence in the market of strengthening economic activity since the start of the year has been accompanied by a rebound in risk appetite, partly as a result of the European Central Bank’s (ECB) Long Term Refinancing Operations. These have increased market liquidity, while the agreement of  the second Greek bailout package has boosted confidence. Such factors may be influential in the recovery in optimism seen in this quarter’s results.

       

      The confidence index provides an overview of sentiment in the commercial property market. It represents the means of the net balances from each of the five key questions asked of respondents. 

      4 table   Confidence Index_Company SizeConfidence Index_Activities Confidence Index_Regions2 

       

      UK PROPERTY MARKET ACTIVITY

      The outlook for commercial property market activity UK-wide has brightened, with expectations of decline giving way to a more stable outlook.

       

      Sentiment about prospects for the UK commercial property market over the coming 3-6 months has improved for all groups since last quarter. However, the pessimists still outweigh the optimists amongst small businesses (net position of -4), major companies (-22), medium to large businesses based in London (-17), and fund managers (-42). The proportion of businesses expecting market activity to stay as it is now ranges from 38% of fund managers to just over half of medium to large principal businesses (54%).

       

      Those predicting an improvement in the UK market cite a seasonal pickup in interest as well as an ongoing softening of prices – which, given low interest rates, should improve affordability.  However, the fallout from the Euro area debt crisis is still seen as a major potential headwind. As one respondent from a major company comments, “Everyone has their eyes on Europe at the moment and I think until that is resolved they won’t do anything else.”

       

      The relative weakness in confidence amongst medium and large firms based in London this quarter (net position of -17) is a notable development, as they have generally been more bullish than their regional  counterparts (+6). This gloomier expectation in the Capital may partly explain the marked  pessimism of fund managers, who tend to be London-based. Only 10% of fund managers expect domestic activity to rise against more than half (52%) who expect UK market activity to slow down, giving the lowest net score on this measure (-42).

       

      Thinking about activity in the UK property market overall, how do you expect it to change over the next 3-6 months? Do you think it will (pick up/stay about the same/slow down)?  

       

      p5 tableUK Property Mkt_Company Size  UK Property Mkt_RegionsUK Property Mkt_Activities 

       

      BUSINESS SECTOR ACTIVITY

      Contrasting with November’s results, expectations for sector activity in the next 3-6 months have broadly improved.

       

      The biggest overall improvement is amongst small businesses whose net score increases by 50 points to +1. They are the least pessimistic group, with only 19% believing that activity in their sector will slow down (compared to 58% in November 2011). Three fifths (61%) of small businesses now believe that sector activity will stay as it is over the coming period. As one respondent in this segment comments, “People think it is at the bottom now, so [they] are more likely to invest. That is counteracted by reluctance and fear of redundancy and less disposable income.”

       

      As with UK market activity, fund managers are the most pessimistic with 42% believing that such activity will ease over the next 3-6 months compared to 10% who anticipate a pickup, giving a net score of -32 points. One fund manager, who anticipates a slight slowing of sector activity, observes that there is, “A greater divergence for performance between prime and other property.” The only other group with a negative net balance this quarter is major businesses (-12).

       

      Thinking specifically about activity in your own business sector, how do you expect it to change over the next 3-6 months? Do you think it will (pick up/stay about the same/slow down)? 

       

      p6 table 


      Own bus company size Own Business Sector_Regions Own Business Sector_Activities 

       

      BUSINESS PORTFOLIO PERFORMANCE

      There are mixed views on portfolio performance.

       

      Despite the more settled outlook for UK market and own sector activity, respondents’ views on how this will reflect on their own business performance vary considerably. Whilst the net balances for medium to large and major companies, advisors and those outside London have all increased, small companies, London-based medium to large businesses, principals and fund managers are all less optimistic than they were in November.


      The net balances range from +35 (major businesses) to -28 for fund managers. After falling for three consecutive quarters, major businesses show the sharpest rise in predicted portfolio performance – although well below their previous peak of +65 in February 2011.

       

      Portfolio optimism amongst medium to large London companies has fallen for the second consecutive quarter. Nonetheless, two fifths (40%) still maintain that their portfolio’s performance will improve and a third (35%) think it will stay the same.

       

      Their less bullish regional counterparts show a modest improvement in optimism. 57% of regional firms now expect no change in their returns with around a quarter (26%) anticipating an upturn. One respondent in the North West of England puts their business’s more positive outlook down to the fact that, “Since Christmas we have been able to obtain a number of jobs. We are now getting more jobs than before, due to being tight on price.”

       

      Over the next 3-6 months, do you expect your business’s portfolio performance to (improve/stay about the same/deteriorate)? 

       p7 table 

        Bus. Portfolio Performance_Company Size Bus. Portfolio Performance_regions  

        Bus. Portfolio Performance_Activities 

       

      PROPERTY VALUES

      Expectations around property values are also varied.

       

      Some of those groups who report a rise in portfolio optimism also expect an increase in property values over the next 3-6 months. Medium to large businesses, major businesses and advisors fall into this category. One major business notes that, “Demand is increasing due to an increase in confidence.”


      Otherwise there are no clear patterns. Regional firms expect portfolio performance to improve yet foresee no change in property values, suggesting perhaps that it is volume, rather than the improved values of individual properties, that will drive their business performance. It may also be symptomatic of agents expecting to raise rents on their existing holdings and/or planning to reallocate their holdings towards properties that promise higher average returns.

       

      At the same time, medium to large principals expect their returns to decline yet also anticipate no change in valuations. This might be driven by anticipated rent softening or planned disposals of some potentially high return but more risky commercial assets.

       

      Small businesses expect static values (59% of responses) alongside static portfolio performances.

       

      Fund managers are once again the most pessimistic group, with their net balance falling for the fourth consecutive quarter to a new low of -40 from -37 in November. 52% believe the value of their properties will decrease. The adverse fallout from the euro and general economic weakness are cited as reasons behind this downbeat assessment.
       

      Over the next 3-6 months, do you expect the value of your (your clients’) properties to (increase/stay about the same/decrease)? 

         p8 table Property Values_Company Size Property Values_regions Property Values_Activities 

       

      PROPERTY INVESTMENT

      Investment intentions have picked up.
       

      With the exception of firms based in London, more businesses expect to invest in the commercial property market over the next few months than was the case last quarter. Given the mixed views on portfolio performance and property values,  this suggests that seasonality and the improved economic backdrop may be encouraging respondents to add to their assets while valuations remain attractive. As one respondent put it, “Prices are getting better for the investor”.

       

      Major businesses continue to show the highest propensity to add to their current stocks: 65% are looking to accumulate further over the next  3-6 months. Only 13% of them are looking to divest, giving a net score of +52. Nonetheless, this is still lower than the +65 they recorded a year ago.

       

      Fund managers, who are the least optimistic in all four of the other tracking measures, are the second most positive group when it comes to investment intention. 44% are expecting to raise investments against 8% anticipating disposals. Although down from a year ago (when their net position was +50) fund managers have jumped 29 points since last quarter to +36.

       

      Over the next 3-6 months to what extent do you (your clients) intend to change your (their) total investment in the property market? (Increase commitment/keep commitment about the same/decrease commitment) 

       p9 table 

       Property Investments_Company Size Property Investments_Regions Property Investments_Activities
       

       

      PROPERTY INVESTMENT 2012

      Fund managers anticipate the largest percentage increases in their property investment (by value) during 2012*.

       

      Although major businesses are the most bullish about expanding their portfolios over the near-term, they expect to make the smallest value  increases – only around 2.6% on average by the end of the year. Fund managers, the second most positive group regarding investment, are set  to make the most aggressive expansions, anticipating an increase of almost 12%. They are followed by small businesses at almost 9%.

       

      RESIDENTIAL AS A % OF PORTFOLIO

       

      The significance of the Residential sector (in terms of Private Rental properties and Development projects**) varies considerably across the different respondent groups. At the top end are advisors, with a portfolio exposure of 63% on average (53% private rentals, 10% development). The next most committed are small businesses averaging 60% of portfolio. At the opposite end of the scale, fund managers currently have around 3% of their portfolio in the residential rental and/or development sectors.

       

      Amongst medium to large businesses, Residential makes up a greater proportion of portfolios for those in the regions than in London. Businesses outside London currently average 59%, almost double the level found in the capital (34%). Within that regional figure the split is fairly even between rental properties (30%) and development (29%). 

       

      Exposures to residential development specifically are highest among small and medium to large businesses, firms outside London and principals.

       

      Amongst most groups some modest adjustments in portfolio balance are anticipated by the end of 2012. Major businesses and fund managers expect to maintain or marginally increase their exposures in the residential market, whilst the remaining groups plan to reduce the proportion devoted to Residential to some extent.

       

      Anticipated percentage change in property investment by end of 2012 (by value) 

       

      Percentage change p10 table 1
       

       

      Average share of property portfolio for private residential renting 

       

                   renting  p10 table 2
       

       

      Average share of property portfolio for residential development 

                   Property Investment 2012 development  pg 10 tab 3
       

       

      Total Residential (Private Rental plus Development) as % of total portfolio  

      pg 11 tab 1 

       

      External Factors

      THE EURO ZONE DEBT CRISIS
      As was the case last quarter, pessimism about the impact of the Euro zone dominates, with net balances ranging from -44 (medium to large principals) to -81 (major businesses).
       

      Looking more closely at those expressing a negative view, however, there is some evidence of an easing of concerns. Amongst small and medium to large businesses, the proportion stating that they believe the Euro issues will have a ‘substantial’ negative effect on their business is abating. Levels at the top end of the market (major businesses and fund managers) have not moved much in real terms (given their smaller base sizes) but suggest the same or slightly broader concern now compared with last November. 

       

      What effect, if any, do you expect the current problems in the Eurozone to have on your business in the next 6-12 months? 

       External Factors Euro  p11 table 2 

      Negative responses to Eurozone question  

      p11 table 3 Hann Ju Ho 

      Hann-Ju Ho Director of Proprietary Data Analysis, Research 

      Hann joined Lloyds Bank in 2006, having previously worked for a macroeconomic fixed income research firm. He manages the proprietary data team and his responsibilities include in-house data and survey development and analytics, as well as econometric modelling and forecasting. Hann has an MSc in Economics

      Jonathan Thomas  

      Jonathan Thomas Proprietary Data Modelling Wholesale Markets 

      Jonathan started his career at the University of Cambridge, before moving to University College London. After a short stint at Department of Trade and Industry where he worked on the implementation of the National Minimum Wage, Jonathan moved to the Bank of England where he managed the money, credit and financial intermediation team. In 2011, Jonathan joined the proprietary data team at Lloyds Banking Group.

       

      * Data drawn from answers to two questions:
      (i) What is your current level of property investment in £?
      (ii) What do you expect your level of investment to be by the end of 2012 (in £)?
      ** Data drawn from answers to two questions:
      (i) What % of your property portfolio currently falls within each of these asset classes: residential private rental; residential development?
      (ii) What % of your property portfolio do you anticipate will fall within each of these asset classes by the end of 2012: residential private rental; residential development?

       

       

     
     
10/21/2014 11:17:55 AM