UK real estate recovery likely to continue, says Aviva Investors’ Philip Nell

Turnaround in UK real estate continues apace as growing confidence in the market encourages investors to increase exposure to the asset class, according to Philip Nell, manager of the Aviva Investors Property Trust.

As 2013 draws to a close, the recovery in the UK real estate market continues to gain momentum, with increasing evidence of gains in the regional and secondary markets across the board. The Investment Property Database for September showed the offices sector outperforming, led by central London, and new improvement in the industrial and retail sectors. At an all-property level, the IPD Monthly index recorded a total return of 2.9% in the third quarter of the year, the strongest quarterly return in over three years, adding weight to our conviction that 2013 marks a turnaround year for real estate.

The retail sector still faces depressed cyclical occupier demand at a time of significant structural change linked to online shopping. Investor sentiment, however, has markedly improved, although there remains significant sub-sector and asset-level variation. Despite difficult markets generally, central London remains an exception with conditions very buoyant. Demand for prime space is strong and rents continue to advance.

Within offices, financial services have been impacted by the pronounced pick-up in economic sentiment seen over the summer months. Confidence is rising cross the sector as are hiring intentions. These trends bode well for occupier demand, especially in central London, where leasing conditions have turned considerably more positive of late. Take-up has risen to above trend levels and upward pressure on rents is building. Regional markets are also showing increased signs of life. Occupier demand has firmed slightly, availability of Grade A space is decreasing and there are tentative signs of a turn in the development cycle in some centres. Conditions in the South East are also more positive from what was an already healthy base.

Looking to industrials, in line with global trends, survey evidence for the sector has continued to strengthen in recent months, though the improvement in the official data on industrial activity has tended to be less impressive than in the surveys. Logistics take-up has recovered from a slow start to the year, boosted by a number of very large lettings to retailers. Reflecting the dearth of speculative development in recent years, the logistics sector has been heavily driven by ‘build-to-suit’ schemes. Rental trends in the sector have turned a little more positive of late, with the downward drift in market rents appearing to have drawn to a close.”

Overall, the prospects for the UK property sector continue to improve. Growing confidence in the economic recovery, loose monetary policy and a mild thaw in credit conditions are all supportive of investor confidence. Capital growth was significantly more positive in the third quarter for the market overall. For now, yield compression is the major driver of the turnaround and the near term is likely to see this trend continue, especially in the higher yielding parts of the market. There are also growing signs of broad improvement in occupier market fundamentals and we expect this trend to continue in coming years and one which should sustain the recovery in real estate returns beyond the near-term yield-driven rally. As a result, we expect UK real estate in aggregate to deliver robust returns on a sustained basis over coming years.

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