Mixed outlook for UK property ETFs

Oct 17th, 2011 | By | Category: Alternatives / Multi-Asset

Tentative recovery in UK commercial real estate shows signs of faltering

The latest RICS UK Commercial Market Survey shows that tenant demand retreated over the quarter which, coupled with rising available space, is resulting in a more negative view on rental expectations. Surveyors attribute the fall in sentiment to the uncertain outlook for the wider economy.

Mixed outlook for UK property ETFs

Mixed outlook for UK property ETFs

At the all property level, respondents turned downbeat across much of the UK, though the picture in London and the South remains broadly flat. There are also some tentative signs that the London market, which has largely bucked the national trend up to now, is beginning to see sentiment ease; rents are expected to fall in the capital for the first time in a year. Meanwhile, outside of London rental expectations turned even more negative.

Significantly, sentiment has fallen across all sectors of the market. Retail demand slipped furthest into negative territory, while available space also rose fastest in the retail sector. Rental expectations at the national level were most negative for offices.

London, South residential property continues to thrive

However, the outlook for commercial property differs starkly to London residential, which continues to thrive. Indeed, Central London residential development land values have risen at a faster rate than underlying house prices over the past year, also outpacing growth in both office and hotel land values, analysis from Savills shows.

Central London residential locations have seen values rise by 4 per cent over the last 6 months, and a total of 17 per cent over the past year compared to 2 per cent mainstream house price growth.

“Although central London land price growth has exceeded house price growth, values remain 10 per cent below peak, suggesting scope for further growth,” says Yolande Barnes, head of residential research at Savills.

Analysis from Rightmove, a UK website which lists over 90% of UK properties for sale, points to a similar trend.

While there was a 2.8% national average increase in new sellers’ asking prices compared to last month, the driver of the rise was the 4.7% uplift in the southern regions (London, South East, South West and East Anglia).

The south’s ability to perform better despite the continuing global financial crisis and resultant credit squeeze is further highlighted by property coming to the market at all-time price highs in both the London and South East regions. London’s £450,210 is 2.6% higher than the previous record set in June this year, while the £317,055 seen in the South East is 0.2% up on the previous high in May 2008.

Compared to the beginning of the credit crunch four years ago, prices of properties coming to market have risen by 5.4% in the south.

Government proposals could benefit UK commercial property developers

Despite sentiment in commercial property turning negative, measures proposed by the Chancellor to make it easier for firms in England to convert commercial property into private dwellings could prove a boon for commercial property developers.

Should the proposals become law developers will not need planning permission to convert commercial properties into private houses and flats.

“Finite land supply, particularly in prime, central locations, coupled with continued demand for high-end product for overseas buyers, has buoyed values and this growth in residential land values arguably strengthens the case for the conversion to residential of sites earmarked for office or hotel use,” says Savills’ Yolande Barnes.

For investors looking to invest in UK property via ETFs, the Dublin-domiciled [tippy title=”iShares FTSE EPRA/NAREIT UK Property Fund”]iShares

iShares FTSE EPRA/NAREIT UK Property Fund is an exchange traded fund (ETF) that aims to track the performance of the FTSE EPRA/NAREIT UK Index as closely as possible.

The ETF invests in physical index securities and offers exposure to UK listed real estate companies and Real Estate Investment Trusts (REITS).

iShares FTSE EPRA/NAREIT UK Property Fund[/tippy], which tracks the performance of real estate companies and REITS listed on the London Stock Exchange, is one such vehicle to consider.

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