DTZ: net capital flows into UK commercial property expected to total

Net capital flows into UK commercial property are expected to total around £24 billion in 2004 reveals DTZ’s 29th annual Money into Property report. A figure of £24 billion would represent a rise of £4 billion on 2003’s figure of £20 billion but falls short of the levels seen in 2002 of more than £28 billion.

The value of UK property investment transactions monitored by DTZ Research during 2003 was in the region of £28 billion, a fall of around 12% on one year earlier. Whilst the total value of transactions declined, this was largely a result of a lack of stock as competition in the market remained strong. Transactional activity is expected to increase in 2004, with renewed institutional direct investment as well as the completion of a number of large corporate deals.

DTZ’s fund managers’ survey reveals that property fund managers expect real estate purchases to increase by 10% this year compared to just 1% last year, while sales are expected to fall relative to one year earlier. Therefore, direct institutional investment is anticipated to be positive in 2004, compared with net disinvestment in direct real estate of £1.3 billion in 2003.

Non-domestic investor appetite for UK commercial property is expected to remain robust, in part as a result of the improvement in leasing markets. DTZ Research forecast that the volume of acquisitions by non-domestic investors will be in the region of £6 billion in 2004.

Based on official data published by National Statistics, DTZ Research estimates that non-bank financial institutions reduced their exposure to direct UK commercial property by £1.3 billion during 2003. This is a function of both a shortage of product and the increasing use of indirect real estate vehicles.

This represents the lowest level of commitment since records began in 1963. Pension funds were the main cause of this decline having reduced their exposure to UK commercial real estate by around £1.5 billion last year. The level of sales during 2003 was 4% lower in real terms than in the previous year with purchases also decreasing by 29%. Liquidity (defined as total purchases and sales as a percentage of year-end holdings) declined for the third year in succession to 15%, the lowest level recorded since 1995.

DTZ Research’s fund mangers’ survey shows that property fund managers anticipate property to outperform other asset classes during 2004. Based on the survey information total returns on property are expected to be 10.4% this year, with equities and gilts to return 9.8% and 3.6% respectively. This anticipated total return is consistent with the May IPF survey of forecasts.

In a change from the survey results of recent years, investment activity is expected to be focused on Greater London and the South East. This is partly a function of the improved prospects for financial and business services in London. Central London offices and industrial units rank the highest in terms of the asset buying priorities of both pension funds and insurance companies, whilst retail parks and warehouses also featured highly.

The survey of fund managers anticipated that real estate purchases will increase by 10% this year compared to just 1% last year, while sales are expected to fall relative to one year earlier. Therefore, direct institutional investment is anticipated to be positive in2004. However, this outturn will be dependant on the performance of other asset classes and critically, the ability to secure sufficient investment grade product.

Indirect investment
Indirect real estate investment in the UK has undergone a number of crucial developments during the past year. Although much attention has focused on the creation of a tax-transparent property investment fund (PIF), both the limited partnership (LP) and property unit trust (PUT) markets have experienced important regulatory changes and relatively strong inflows. At the end of the first quarter of 2004, LPs, PUTs and managed funds had a combined net asset value in excess of £28 billion.

In recent months, limited partnerships hav

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