Liquidity will return to the marketplace in the UK faster than other European markets and now is the time to buy ahead of significant yield compression according to David Birchenall, Chief Executive of Bircroft Property Finance.
According to Birchenall: "Institutions have been aggressively buying long dated quality leases. But we are beginning to see the next level of activity emerge following some funds reining back on cash inflows because of a perceived shortage of stock. This has created an opportunity for conservatively leveraged buyers".
His comments follow the news that Hermes Real Estate and Threadneedle Property Investment are staggering new investment in their open-ended institutional property funds to ensure that managers are not under pressure to deploy cash. The move to limit inflows to property funds marks a sharp reverse to the prevailing trend of the past two years.
Threadneedle has moved to stagger new allocations to the Threadneedle Property Unit Trust, which grew from £310 million at the start of the year to more than £400 million at the end of the September. The fund has now reached its maximum liquidity limit of 20%, and so new inflows of cash will not be taken until the fund has made acquisitions. While Hermes has 4% liquidity in its £486 million Hermes Property Unit Trust, well below the 10% maximum, it too has moved to stagger new inflows.
Mike Riordan, Head of City investment at Gerald Eve, explained: "This move underlines the limited supply of good quality investments currently available and the difficulty in deploying funds. Even if this move is followed by additional funds, there still remains a considerable weight of equity seeking a home in the commercial property sector."
Birchenall believes the imbalance of demand over supply will self-correct. "We believe the wave of money that sees fundamental value in UK property, and the resulting hardening of yields will tempt new sellers into the market particularly the banks.
"However stock selection is still key. The principal risks reside in rent stability and tenant default, but we are reassuring our clients that we can source a number of lenders in the market who will back portfolios with diversified income streams."
Source: Brown Lloyd James Financial