IPD - Europe Real Estate

Output in the construction sector crashed 5.2% in the second quarter, following a 4.9% slump in the previous three months in according to ONS estimates published last week. Total returns for investments in commercial property slumped to 0.4% compared to 0.8 the previous quarter, held positive through the inclusion of London.

Now the latest quarterly index by IPD, the benchmark used by investors in commercial property, shows that net investment in property outside of London (including investment, sales, development and refurbishment) was -?161 million (approx. ?204 million) during the last quarter, negative for the first time since March 2009.

The amount spent on investment, development and refurbishment of offices, shops and warehouses is vital in showing the level of confidence investors have in the future of our economy. A vibrant business sector sees investment into workspace and retail increase, as landlords expect to be able to take on new tenants.

Weak consumer demand and struggling local industries made it increasingly difficult to secure viable tenants outside of London. This means that regional commercial property has been heavily discounted, by up to 45% in some sectors, and with income yields of over 7%. Despite this, investors are still wary of the discounted assets.

Tenant covenant strength, and thus income security, have played a huge role in this. Risk weightings conducted by Dunn and Bradstreet found that 13%, or almost 1bn in rental terms, of UK let tenants are considered high or maximum risk, and the average lease length on a newly let tenant is now under five years.

Of the UK?s cities, Derby, Swansea and Plymouth are the country?s biggest losers in terms of property value decline, with each town seeing values falling by over 40% since June 2007 - though even in Manchester values are almost 40% below their peak.

Property assets in the UK are now underperforming even the struggling Irish property sector, for the first time since 2008. London continued to see growth in values for the quarter, but even this slowed to just 0.4%, down from 1.6% in the same period last year.

Investment from UK funds into the Capital has dwindled in the last year, as UK based buyers are finding themselves priced out of traditionally volatile markets that have taken on the status of safe havens for international investors. The number of purchases of City offices, one of the most volatile of the London markets, fell by 43% in the year to June 2012 from the same period a year ago.

Despite this, UK based investors have not redirected their attention to regional centers, instead focusing on fringe locations in London and alternative real estate assets, which are still seeing growth.

Phil Tily, IPD UK and Ireland Managing Director said: "Without investment in offices, shops and warehouses, communities will not be able to recover from the current economic woes. First we?ve seen the collapse of construction and now we?re seeing a regional squeeze on commercial property. Investing into regional real estate is too risky for institutions and unless we see consumer demand pick up, that isn?t going to change any time soon.

"For those investors willing to take a punt, the UK regional markets offer considerably better value than in London. However, local occupier demand remains extremely low, in part due to the chancellor?s austerity cuts, and for that reason property funds are holding back from investing their money into the regions."

The findings bring little cheer to an industry still struggling with debt repayments and restructuring, and a lack of finance for refurbishment and redevelopment. Furthermore, in May IPD reported that UK developments have returned, on average, only 0.0% over the last two years, a further dampener on efforts to re-start the private construction industry.

UK cities remain some of the most discounted in the world. In Birmingham values are 39% below their pre-recession peak, Liverpool 31%, Manchester 40% and Edinburgh 33%. This is attracting the attention of investors, specifically for potentially high income yields, but the lack of certainty surrounding sustainable tenancies is holding many back ? and driving down values further.

Of 30 cities outside of London measured, only one, Aberdeen, was still seeing positive capital value growth, while 27 saw capital declines of over 1% for the quarter.

Source: IPD

Source: http://europe-re.com/system/main.php?pageid=2616&articleid=20686

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