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The Lloyds Bank 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 twelfth 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. The last quarter’s results show mixed sentiment surrounding the sector’s prospects, with rising and falling levels of optimism depending on the size and location of respondents’ companies. While there is clearly some pessimism surrounding immediate prospects for market activity, portfolio performance and in some cases property valuations, investors are nevertheless seeing the opportunity for longer term value growth when buying at today’s prices. To take advantage of this pricing against a backdrop of generally constrained lending, investors will need to work with their core banks to develop more innovative approaches to investment funding from the debt capital markets.
Having rebounded from November to February, a more static UK commercial property sector is expected by many over the next 3-6 months. The latest findings from the Lloyds Bank Commercial Property Confidence Monitor, produced in association with the Investment Property Forum show pockets of optimism, particularly amongst major businesses and medium to large organisations in London. However for many others the expectation is that nothing much will change in this coming period. Fund managers, who have often been seen as the bellwethers within the study, remain broadly pessimistic about the prospects for the market and their own businesses. However their investment intention is high, second only to that of major businesses. Looking specifically this quarter at the market’s response to the needs of specific sectors we find expansion plans within the Hotel and Leisure sectors to be highest amongst medium to large businesses in London - over three times the level seen in the regions. The greatest commitment to the Healthcare sector, however, comes from small businesses. Technology, Media and Telecomms (TMT) is recognised as a positive influence on the UK property market and on individual businesses, with between 13% (small businesses) and 38% (fund managers) of commercial property businesses planning to adjust their strategies in the coming year to meet the needs of the TMT sector.
While sentiment continues to strengthen for major businesses, medium to large firms in London, fund managers and medium to large advisors, it has fallen back among small businesses, medium to large regional firms, medium to large principals and medium to large businesses overall.Major businesses show the greatest positive shift in overall optimism, up 13 points. With a confidence index of +29, they continue to be the most buoyant about their prospects, followed by London-based establishments (up 9 points) with a balance of +18. With the exception of fund managers, where pessimists firmly outweigh optimists with a net balance of -17, the remaining groups’ confidence indices are fairly close to zero.The underlying components of the index are also varied. While the outlook for UK activity and portfolio returns has softened over the next 3-6 months, property values show signs of improvement which may help to account for an accompanying firming of investment intentions. This mixed picture for the commercial market since February is consistent with wider economic developments. The UK economy relapsed into recession during the first quarter of this year, partly on the back of an intensification of the euro area crisis, but growth is expected to return by Q3. Meanwhile the labour market has remained resilient and easing inflation should boost real income growth. This could help to support activity in the property market over the next few months. The confidence index provides an overview of sentiment in the commercial property market. It represents the averages of the net balances from each of the five key questions asked of respondents.
After an upturn in the quarter to February, the outlook for UK commercial property market activity over the next 3-6 months is broadly static.Sentiment has cooled for most groups since February. Only major companies (up 26 points to net position of +4) and medium to large firms based in London (up 34 points to +17) report a net expectation of growth in the UK commercial property market. However, where optimism has receded for the most part it still remains well above its recent lows of in November 2011. The bulk of respondents feel that activity will remain at current levels rather than declining or growing.Fund managers, however, remain particularly downbeat about UK prospects. 50% expect a slowdown against only 4% who envisage any improvement. Those with a negative view of the UK market cite weakening investor confidence - partly on the back of the first quarter’s double-dip in output - ongoing difficulties in securing bank credit and the recent intensification of the euro area debt crisis. There are signs of hope quoted too, however. Low interest rates, affordable prices and the potential optimism boosting impact of the Diamond Jubilee celebrations and the Olympics are cited as factors that could improve the market’s fortunes in the coming period. As one major company noted, “The Queen’s Jubilee and Olympics will give the country a feel good factor and give confidence in the market place.”
For most, expectations are of stability in sector activity. As with UK activity, only major businesses and medium to large firms in London foresee an overall improvement in their sectors’ activity over the next 3-6 months. Major businesses report the largest pickup, with an improvement of 24 points to +12; medium to large London-based companies are the most optimistic with 31% expecting an upturn in sector activity compared to 11% who anticipate a slowdown.Fund managers, although gradually recovering from their considerable dip in sector optimism in November 2011, are still largely negative. They remain the most pessimistic group with only 10% expecting activity to strengthen over the next 3-6 months (the same as in February) against 36% who anticipate a slowdown.Their low level of enthusiasm, which matches their view on the broader UK picture, reflects investor caution and a dearth of suitable opportunities which have put a brake on new inflows into property funds. Indeed as one fund manager put it: “There is little new investment in property funds in general. There will be more exposure to redemptions.”Residential Letting remains the sector that all groups believe is most likely to prosper over the coming period, ranging from 30% of fund managers to 53% of medium to large advisors.
Portfolio performance is also generally expected to stay as it is.Only major companies, medium to large advisors and fund managers show improved optimism about their portfolios compared with February’s findings. Nonetheless, most net balances remain in positive territory with those who predict improved portfolio performance outweighing those anticipating a deterioration in returns.Sentiment amongst major businesses and medium to large advisors has risen for the second quarter, although both are still below their recent peaks of 12 to 15 months ago. In contrast, optimism amongst medium to large organisations in London has fallen for the third consecutive survey and is now at +16, its lowest level since the survey began. The net balance for small companies has also dropped to a record low for the study (-3), although around three-quarters (76%) of these companies believe that their portfolio performance will remain unchanged over the coming period. The factors weighing upon the outlook for small companies include poor access to bank finance, global economic difficulties and a weak labour market.More generally there appears to be downward pressure on rents. According to one medium to large business in the Midlands, “We have new tenants coming in and we have to give them a rent free period,” whilst another in the same region notes that, “Leases are falling and may not get renewed, [there are] lots of empty properties.”
Investment intentions continue to recover for most groups.
Apart from medium to large firms based in London and medium to large principals, investment intentions are up compared to February. This chimes with attractive valuations and, for some, the capacity to invest. A major business comments that, “We have funds available for investment so [we are] looking to increase income,” whilst a small company states that, “Property is so cheap, people are starting to buy.”
However, since peaking at +52 in August 2011, the investment appetite amongst firms in London has fallen sharply. Only 30% are now looking to accumulate over the next one or two quarters, while 13% are looking to divest, giving a net score of +17.
Although fund managers are the most negative about UK and own sector activity, portfolio performance and property values, they trail only major businesses in their appetite for acquisitions over the next 3-6 months. This partly reflects their view that there are affordable bargains which are worth chasing. 65% of major businesses and 58% of fund managers intend to increase their investment in commercial property in the coming period.
Hotel & Leisure as a % of portfolio
Most groups expect to increase their exposures to the hotel and leisure sector during 2012.
Only major companies plan to reallocate away from the hotel and leisure sector (a small net reduction of around -0.5%). London-based medium to large companies have the highest allocations to the sector at almost 7%, compared to between 2.1% and 3.4% for other groups. These businesses also anticipate the largest percentage point increase in exposure to around 9%, possibly in response to the increased focus on the Capital as a result of this year’s events. They are followed by advisors and medium to large businesses, both at 3.5%.
On the whole, the data suggest that those groups with the strongest plans for reallocating their ortfolios towards the hotel and leisure sector tend to have the weakest intentions to expand their total investment over the next 3-6 months. However, this result is largely driven by major companies who have the strongest investment plans coupled with an expectation of reducing their hotel and leisure exposures, and London-based companies who have the weakest intention to further build their portfolio but display the largest percentage point swing towards hotel and leisure properties. Among the remaining groups (especially small businesses, principals, medium/large businesses and advisors), the relationship is positive, with those who report the strongest expansion plans also anticipating the largest increases in their hotel and leisure exposures.
Healthcare as a % of portfolio
All groups are looking to increase their exposure to healthcare by the end of the year.
With almost 2.5% of their portfolio, small businesses have the highest exposure to the healthcare sector and the figures suggest that this is likely to remain the case for the immediate future. Medium to large advisors and major businesses plan the largest percentage point increases in allocations, both from less than 1% to nearly 2%. At 0.34% firms in London have the lowest allocation to the sector.
In this case, those groups who report the strongest plans for reallocating their portfolios towards the healthcare sector, such as major businesses and advisors, tend to also report the strongest net balances for investment commitment. However, once again the result is largely driven by a few cases, specifically major businesses and medium to large principals and advisors.
The Technology, Media and Telecommunications (TMT) sector is widely seen as having a positive impact on the UK market...
In principle, an expansion of the TMT sector could have a positive impact on total activity via a higher
demand for office space. However it could also trigger a potential fall in appetite as firms take advantage of the increased opportunities for outsourcing and remote working facilitated by services TMT businesses can provide.
On balance, this research finds the influence of the TMT sector on the UK commercial property market activity is viewed as favourable. However, the extent of this approval varies considerably. Small businesses are the least enthusiastic with a net balance of +3, while major companies and fund managers are at the other end of the scale with scores of +30 each. 46% of fund managers believe TMT activity is a positive influence on UK property market activity.
...as well as on respondents’ own businesses.
In addition to their positive UK-wide impact, TMT developments are seen as having a net positive impact on respondents’ own businesses - notably amongst fund managers, medium to large London based companies and major establishments. The strength and influence of this sector in London is particularly apparent. 41% of medium to large businesses in the Capital see a positive effect, compared with just 24% in the Regions.
However, the TMT sector is not set to have a widespread impact on company strategies over the next year.
Despite the perception that TMT activities have been positive for the commercial property market, a majority of companies do not plan to adjust their business strategies over the next 12 months to accommodate its influence. This may reflect the fact that the key company objectives are not reliant on TMT developments. Only a minority say that their strategy already addresses the needs of the TMT sector, the largest group being 12% of major businesses.
Once again there is considerable variation in net responses ranging from -13 for medium to large advisors to -64 for small businesses. Only 2% of fund managers already cover this sector in their strategy, but 38% intend to adjust to accommodate TMT’s needs in the coming 12 months.
Hann-Ju Ho Director of Proprietary Data Analysis, Research Hann
joined Lloyds Banking Group 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 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.