UK Commercial Property Market may provide Boost for European Stocks

Posted on 14 September, 2013 by Jodee Redmond

Confidence in the sustainability of the UK’s economic recovery has spread from London to the rest of the country’s commercial property market. This pattern is likely to be mirrored throughout continental Europe and underpin shares of listed property companies, according to an Exane BNP Paribas analyst who spoke at the European Public Real Estate Association’s annual conference.

Nick Webb, Property Analyst at Exane BNP Paribas, stated that for the past few years the London market has outperformed the rest of the UK to the extent that it could almost be considered as a different country. Now, that positive streak is spreading to the regions.

Capital values have broken their 18-month downward trend and key leading indicators like the RICS survey suggest that 2014 may be first year where the market sees average rental growth since 2007.

UK consumer confidence is increasing and retailer failure rates have dropped to normal levels, which is creating a more stable environment for the industry. Rapidly-evolving supply chains are leading to strong demand for new logistics space, which is giving the industrial sector a much-needed boost. It has not seen real rental growth for over a decade.

Mr. Webb went on to say that UK long-term interest rates have changed considering the improvement in the country’s fundamental economic conditions. The 10-year UK government bond (gilt) yield rose 100 basis points to 2.6 per cent from May to July.

He pointed out that rising rates are not as big a concern to the commercial property market as many people might think. The statistical analysis conducted by Exane BNP Paribas revealed the following:

  • The long-term correlation between UK property equivalent yields and nominal gilt yields is zero.
  • When it comes to the key driver of property values, inflation is the one to watch. Liquid and faster-reacting real estate equities tend to out-perform the broader market in rising interest rate conditions.
  • Pension funds have tended to allocate a higher portion of their assets to property in high interest rate environments than in lower ones.

Mr Webb concluded by contrasting the UK market with that of France which has not bounced back from the recession as quickly. However, he points out that it is well placed to do so when fundamentals become more supportive.




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