The UK commercial property market is showing renewed optimism, according to new research in the Commercial Property Confidence Monitor for Lloyds Corporate Markets, with investment intentions at their highest since the survey began.
However, some fund managers and business advisers are urging caution as retail business failures and uncertainty over the future direction of the UK economy continue to dominate, and optimism in the commercial property market remains well below the level it was this time last year.
The Lloyds survey reveals a distinct two-tier UK commercial property market that is focused primarily on London and the South East, with most investment there fuelled by equity funding. However, there are some signs that commercial property investors may turn to regional markets outside the capital and surrounding areas for value growth and that greater acceptance of alternative funding streams could unlock wider opportunities.
Confidence in the UK commercial property market remains stable, according to the report. However, despite the continued rise in optimism, this is now at low levels compared to twelve months ago. Confidence remains strongest among major businesses and is biased towards London, with 82% of major businesses intending to increase their exposure to commercial property within the next three to six months.
The survey also found a shift away from bank lending as a first choice for sources of funding. Less than half of medium/large businesses and a similar proportion of fund managers intend to use bank debt to fund their investments in commercial property, while 65% of major businesses intend to do so. For small businesses the figure was around a quarter, 27%.
However, more than a quarter of medium/large businesses mentioned their own equity, third-party equity or cash reserves as their first preference for funding commercial property investments, together with a third of fund managers, around a quarter of major businesses and 41% of small businesses.
Lynda Shillaw, Lloyds Bank Corporate Markets’ Managing Director of Corporate Real Estate, said that: ‘This represents a fundamental shift in the dynamics of property funding. Three years ago we would have expected 80 to 90% of the market to be relying on bank lending. While we continue to lend on property, investors are increasingly using equity to allow them to execute deals quickly and with certainty, often with a view to securing the right funding solution later.’
As well as debt and equity, the Lloyds survey revealed a small tendency for alternative forms of funding commercial property investments via capital markets and other methods. Shillaw believes this is explained by a lack of awareness in the market generally about the alternatives to commercial property investors, reinforced by the easy availability of cheap bank finance prior to the financial crisis.
Most investors still regard London and the South East as safe havens for commercial property investments, particularly given the unstable global financial situation. The South East is the most favoured place outside the capital, with between 26% and 41% of businesses saying they would be most likely to invest in commercial property there rather than anywhere else. The Midlands is the next most popular location, mentioned as a first choice by 18% of major businesses and 13% of medium and large businesses. Small business voted the North West as their first choice outside of London and the South East.
