By William Kemble-Diaz
LONDON (Reuters) - Britain's property stocks may face an extended bear market as the returns slow on bricks and mortar, leaving market bulls with nothing to lean on but hopes for property company takeovers.
Britain's listed property sector is already down 19 percent so far this year despite newly won tax privileges after several firms converted into real estate investment trusts (REITs).
That follows an outstanding 2006 in which UK property stocks rose by almost 50 percent in anticipation of the new REIT legislation.
The correction may have further to go, even though a UK property crash is still seen as unlikely by market experts.
"Don't be tempted to jump into the property sector," analysts at Morgan Stanley said in a note on Thursday, which warned of the stock market's capacity to overshoot on the downside as well as the upside. "We think the factors that have driven the sector down so far this year have some way to run."
The consensus among key industry figures at the Reuters Real Estate Summit this week was that Britain's property price boom was over or almost over but that higher rental growth will partly compensate landlords, especially in the central London office sector.
Is the UK commercial property market heading for a soft landing? "Absolutely," said Francis Salway, chief executive of Britain's biggest REIT, Land Securities (LAND.L: Quote, Profile, Research, Stock Buzz), at the summit on Tuesday. "Because we have a strong economy," he said, citing strong and rising occupier demand for office space.
Investors have long known that commercial property returns are set to halve this year and to halve again in 2008 -- that is clear from consensus expectations data published by the Investment Property Forum.
With yields on prime UK property shrinking well below 4 percent and benchmark borrowing rates above 6 percent, debt-financed property investment has grown increasingly untenable, robbing the market of a key font of liquidity.
And as liquidity ebbs, it exposes investors who have taken high risks without strong financial backing. The recent failures in the U.S. subprime mortgage loan industry are a case in point.
SECONDARY FAILINGS
According to summit speakers Tim Wheeler of Brixton (BXTN.L: Quote, Profile, Research, Stock Buzz) and John Richards of widely tipped takeover candidate Hammerson (HMSO.L: Quote, Profile, Research, Stock Buzz), there are hints of that already happening, because some investors had overpaid for poor-quality buildings in secondary locations relative to better assets in key locations.
Among the vulnerable investments are secondary shops and industrial properties outside southeast England, they said.
"The trouble with A-rated assets is that they tend to get confused with B-rated assets, usually by holders of B-rated assets," Richards said on Wednesday.
UK pension funds and leading property companies have tried to prepare in recent years for a downturn by diversifying their real estate abroad, selling non-core holdings, focusing on defensive high-end assets, buying buildings with unfulfilled rental possibilities or embarking on development programs to lift earnings. Continued...
© Thomson Reuters 2009. All rights reserved.
| Global Finance | Nov 16 - 19, 2009 | Financial Services / Exchanges |
| Health | Nov 09 - 12, 2009 | Health |
| Autos | Nov 02 - 4, 2009 | Autos |
| Middle East Investment | Oct 26 - 28, 2009 | Country Summits |
| Washington | Oct 19 - 21, 2009 | Country Summits |
