All three sectors delivered positive capital growth for the first time since the second quarter of 2007 over the three months to September, delegates at the IPD/IPF PDIG Quarterly Briefing were told.
According to the IPD UK Quarterly Property Index, the 1.5% positive capital growth recorded over the third quarter was the largest quarterly figure since Q4 2006. A modest upturn was also confirmed in the synthetic market with IPD's Head of Indices Angela Sheahan revealing to delegates that Q3 global property derivatives trading volumes were the strongest this year with £762 mln. worth of contracts executed in 78 trades. The UK still dominates, accounting for £670 mln. in 69 trades.
At the morning seminar hosted by law firm Herbert Smith Rebecca Graham, Senior Analyst at IPD, told delegates: "Five out of IPD's 10 market segments delivered positive capital growth, led by Retail Warehouses which gained 4.0%." The chart below illustrates quarter segment level improvement.
In the Q&A session which followed, conference chair IPD Co-Founding Director Ian Cullen, asked Gary Sherwin, Head of Retail Investment at Land Securities, why Retail Warehouses are always the first market segment to recover after a property recession. Sherwin answered: "Retail warehouses appeals to a wider variety of investors, have low tenant failure and we have seen some good news flow from dominant tenants in that sector recently. The improvement has been led mostly by small lot size deals.
"From solitary offers at the turn of the year, to now having several bids to choose from on assets for sale, this has fed through to improved pricing in the third quarter. Improvements in the number of banks willing to lend up to £50m has also helped. As a result, overseas investors, including sovereign wealth funds, as well as domestic institutional investors are coming back." Retail capital growth was 2.1% over Q3.
Behind Retail, the Industrial sector's capital growth over the third quarter was 1.5% level with the all property average. Simon Jenkins, First Vice President of Development at ProLogis told delegates the return of the occupier market was the principal the cause for improvement. "We still, though, expect next year to be tough," he cautioned.
Jenkins continued: "Occupiers are taking advantage of particularly good deals which the threat of empty rates has created as landlords we have an even greater imputes to get tenants in, fuelling the move towards shorter and more flexible leases in the process. Yields, though, still need to come down further."
UBS Portfolio Manager Sam Sananes explained the enduring popularity of central London and West End offices despite their volatility. He told delegates: "The weak sterling has driven overseas investors in UK central London offices seem good value and there has always been an appetite for offices among that investor base. Domestic investors will more gradually start to show more interest as the rental story improves, which I expect it will."
Commenting on the derivatives trading volumes ahead of the briefing Nick Scarles, Chairman of the IPF PDIG and Grosvenor's Group Finance Director, said: "This quarter's derivative volumes show a continuation of the gradual market recovery, both in absolute terms and relative to the level of direct property transactions. While the substantial reduction in the number of transactions has been balanced with an increase in average deal size, what stands out is a significantly increased market participation by end users."
This final sentiment was echoed by Deutsche Bank's Senior Trader Charles Harris at the breakfast seminar. Harris told delegates: "End user activity has leapt up across the board. There are different rationales for trading now: from asset managers looking to rebalance portfolios, to investors seeking protection against further falls, while some will simply be looking for a quick property market exposure. We have hit the point now where those looking at the market and using derivatives outnumber those who are not looking a