IPD: Third quarter capital growth is shallowest of the year, delegates told (UK)

Modest rental uplifts over the third quarter failed to prevent the shallowest quarterly capital growth of the year, delegates at the IPD/IPF/PDIG Quarterly Q3 Briefing were told yesterday.

At the morning briefing – held at Herbert Smith's headquarters in central London – Phil Tily UK Managing Director at IPD told delegates while there were positive returns across all segments there was a noticeable divergence in fortunes across different parts of the market.

He continued: "The property rebound appears to have now run its course – with all key set of growth measures now trending to zero."

Rental value growth finally crossed into positive territory, at 0.1%, brining to a close to a nine-quarter stretch during which we have seen rental values fall by just over 10%.

Tily added: "We have reached a point of inflection – everyone is trying to second guess what's ahead: is it teetering on the brink of decline or is the market well positioned to be able to respond to any improvement in the underlying economy?

"Surveys suggest a degree of confidence among investors in the performance of their own portfolios – arguably reflecting the fact that strong asset management will still be able to yield results even in the face of somewhat fragile market fundamentals."

Most markets have seen rental improvement, led by central London where offices in particularly delivered a 1.2% rental value growth, which Tily says was "buoyed along by an upsurge in demand, and the fact that supply, particularly at the prime end remains very tight".

He added: "London is clearly running way ahead of the rest of the country."

Rents among industrial and retails are still in decline, with quarterly falls of -0.2% in the case of the former and -0.4% in respect of Standard Shops. Tily said consumer-facing sectors are arguably more affected by tax rises and job cuts.

The morning briefing – chaired by Sir Stuart Lipton of Chelsfield Partners – also included a UK economic presentation by Jamie Danhauser, Lombard Street Research as well as a panel discussion with Paul Rostas, Head of Property Derivatives at ICAP and Paul Dennis-Jones, Director UK Real Estate at Pramerica Real Estate Investors.

Global property derivatives: trading volumes bounce back
Following the quarterly direct market update, the IPD Global Property Derivatives trading volumes for the third quarter were delivered.

The global property derivatives market bounced back over the third quarter with the strongest quarterly trading volumes this year – at £756 mln. The trading volumes, more than double Q2's £300 mln., bring the year-to-date levels to more than £1.5 bln.

Nick Scarles, Chairman of the PDIG and Grosvenor's Group Finance Director, said: "The strong recovery in the volumes quarter on quarter reflects not only a general recovery in the financial markets as a whole, but also the level of pricing which has been attractive to investors and those who trade in property derivatives for profit."

In addition to which, the third quarter has seen the strongest-ever quarterly property derivatives trading on the futures market via Eurex. The sum of open interest as at the end of October was 1,429 contracts, (approx. £72 mln.). The majority of interest is on the calendar 2010 contract.

"The key attraction in using Eurex is that it reduces counterparty risk," explains Kate Pedersen Derivates Client Manager at IPD. "It provides central counterparty clearing and it nets derivative exposure. In this regulatory environment, both of these are important balance sheet considerations."

In the over the counter derivatives market, the vast bulk of trading activity came in the more mature UK market, comprising 78 trades worth £731 mln., with French trades reflecting £25 mln. – down on the previous quarter which saw £54 mln. across five trades. The total outstanding notional is now over £8 bln.

Pedersen added: "The third quarter saw a decrease in the direct property turnover to £3.6 billion, so the ratio of derivative traded to direct property has risen to 20%

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