Property market polarisation may be an opportunity
The weaker economic backdrop, which in turn has subdued business investment, is a large part of the explanation for the major deterioration in value of lower-quality secondary property assets in the UK – apart from the Central London offices market, says CBRE.
London’s status as a global financial and business centre means the economic drivers of the capital are distinct from those for the rest of the UK, and there is a degree of investor confidence in the London occupier markets as a result that does not extend to the whole country. Investors appear to be more willing to take property risk in the market for secondary property in London, the firm notes.
CBRE says the polarisation of the UK market is also being driven by the purchasing activity of equity-based investors, for whom security of income is a top concern. The availability of new debt for investment is still very constrained, focusing on secure assets and demonstrably sound borrowers. Some lenders are winding up loan portfolios that contain large amounts of debt on lesser-quality assets. And overseas investors remain focused on the London market, which they consider a safe haven.
These factors explain the widening yield gap between prime and secondary property and why the Central London offices market has not behaved in the same way as most of the rest of the UK market, CBRE says. The firm has considered what it might take to bring about a reversal of the current polarising trend, and says one factor would be a change in debt markets, to make finance available across a wider range of regional markets and including higher-risk assets. It feels, however, that this is some way off and says any return to the lending market conditions of 2005-2007 is a “very distant prospect”.
The real economy, therefore, is the most likely and necessary trigger for reducing polarisation, it argues – and the current trend appears likely to persist until there is renewed economic growth and higher business investment.
“Investors who have confidence in the prospects of economic recovery may see the present highly elevated yield spreads on secondary property in the UK as a major opportunity,” CBRE notes.
