Hedge Funds Return To UK Property
Tuesday, February 09, 2010

Hedge funds are showing renewed interest in London's commercial real estate sector as low interest rates and more confidence among investors over economic prospects fuel demand in the asset class, not just in the UK but globally.

Oliver Gilmartin, senior economist at the Royal Institution of Chartered Surveyors (RICS), says that the UK commercial property sector in particular has become an attractive investment due to a lack of supply of quality office space coming on to the market, which is driving prices higher, and because of the relative weakness of sterling versus the euro.

"UK real estate has become quite an attractive investment when compared to euro denominated assets," he was quoted as saying by Hedgeweek.

Offices in central London are set to record double-digit rental growth in 2010, as London’s internationally-facing economy benefits from an upswing in global trade and financial markets, according to Knight Frank, the global property consultancy.

In addition, the firm expects that a lack of speculative development will result in a sharp fall in availability in the next two years.

Knight Frank also forecasts a significant increase in values this year, as the projected rental growth is priced into the market and more institutional property funds look to invest in 2010. The firm anticipates the rebound in property prices to be sustainable, as activity is consistent with past cycles and there is continued interest in London offices from sovereign wealth funds.

According to Knight Frank, City prime rents are forecast to increase by 19% in 2010 to GBP52.50 per sq ft (up from GBP44.00 per sq ft in 2009), due to a shortage of high quality office space and revived tenant demand. Rents are forecast to rise to GBP67.00 per sq ft by 2014, an increase of 52% over five years.

“Although the situation in the UK economy is fragile and will remain so, I view developments in the global economy and financial markets as more important for the London office market," said James Roberts, head of central London research, Knight Frank. "This is due to the international profile of companies operating here. Many of the largest office occupiers in the capital earn most of their revenues overseas, and I believe recovery for the world economy will lead to increased office demand in 2010.”

On the residential side, the Knight Frank Central London Index shows that prime central London prices rose 1.1% in January, the 10th consecutive month of price growth. Last month’s price growth was the slowest since August 2009 and is markedly lower than the 2.1% recorded in December 2009. However, on an annual basis price growth is now running at 11.5%.

Prices are now 15% above the low point reached in March last year, but 12% below the market peak reached in March 2008. The strongest price growth has been experienced at the top of the market; property priced at GBP10m and above saw 1.5% growth in January, continuing the process of "catch-up" in this sector, the index shows.

Liam Bailey, head of residential research at Knight Frank, noted: "Since last April the combined impact of ultra-low interest rates, government stimulus, and rising confidence from buyers - about their own and the economy’s prospects - have served to push prices higher. As we stand, at the beginning of the 2010 spring market, there still seems to be considerable life left in the recovery in pricing. While buyers are back in force, vendors are few and far between, creating a significant imbalance between supply and demand."

In commercial real estate at least, the RICS Global Commercial Property Survey Q4 2009 suggests that a decent recovery is now taking place at a global level, with investor activity having risen across 70% of the world in the fourth quarter of 2009.

The survey showed that commercial property transactions rose across the majority of the globe with Brazil and China leading the way, fueled by low interest rates and relatively high yields. The net balance of surveyors reporting a rise in transactions in Brazil rose from 2% to 61% in the fourth quarter while the net balance in China edged up to 58% from 47%. However, more surveyors again reported a drop in activity in the US.

The UK property recovery was led by the London office market, with the amount of available space declining for the first time in two years. However, elsewhere in the UK and across 90% of the globe, the amount of available space continued to rise.

"The latest Global Commercial Property Survey demonstrates in the clearest possible terms that it is emerging real estate markets where sentiment has turned around most significantly. Crucially, the improvement in investor appetite is being accompanied by a firmer tone to the rental market. This is key to ensuring that the recovery proves sustainable," commented Simon Rubinsohn, RICS chief economist.

"The strength of the results contained in the survey for Latin America and Asia are a reflection of the unfolding economic recovery with many of the more developed markets likely to be hampered by the challenges resulting from the ballooning of public sector debt and need of the authorities to gradually exit from emergency monetary conditions," Rubinsohn concluded.