Recent years have seen many investors striving to maximise yields in a largely difficult climate, and property funds have been major beneficiaries of this profit-focussed approach. They collectively took in £2.7 billion of investment last year and a record £3.8 billion the year before. 2015 saw a total 12-month return of 13.1% recorded by the IPD UK Annual Property Index, compared to just 1% for bonds and -2.2% for equities.
Property has certainly seemed like a bit of a golden asset-class for profit-seeking investors lately, but a number of factors are now starting to bite the sector. Experts now forecast that 2016 will see returns in the commercial sector will be much lower than they have been of late, and could reach as little as half the level that investors have become used to in recent years. Estimates are generally within the 6-9% range, having recently been lowered in light of warnings from multiple quarters about the dangers facing the sector this year. Some forecasters even fear that a crash may be approaching.
A number of factors are behind these gloomy predictions, including recent rapid growth which some fear will overheat the market, and high levels of household debt. However, one of the key factors in play is the EU referendum to be held in June. Uncertainty over the outcome of the referendum and fears over what an exit could mean for the property sector are significantly dampening the market at present.
These concerns are far from sudden. Last year’s capital inflows were hardly modest at £2.7 billion, but this is a significant decrease compared to the previous year’s £3.8 billion. Furthermore, net retail inflow for property funds was noticeably tailing off towards the end of the year, and was pronouncedly lower in the later months especially than it had been at the same time in 2014. In December, for instance, capital inflows for property funds were only around half of the levels seen a year earlier, totalling £151 million. This was followed, in January of this year, figures from the Investment Association say, by a net outflow totalling £27 million.
According to Schroders’ head of real estate Mark Callender commented: “We expect the UK to stay in the EU but there could be a hiatus in occupier and investor demand before the referendum, particularly if the polls suggest a close result.”
The situation could be more difficult, Callender suggested, if the UK does vote to leave the EU, if this should be the outcome of the referendum, he said, “then parts of the market could experience capital and rental value declines, with the City of London and London residential potentially at the greatest risk.”
However, while a slowdown in the property market this year is pretty much universally agreed, forecasters are, for the most part, not entirely pessimistic. As Mike Roberts, the head of Canada Life Investments’ UK property team points out, credit markets are much healthier than they were before the last property crash, and the market is also lacking in oversupply. This is perhaps why forecasts for this year’s returns, while significantly lower than those of the last few years, remain ahead of many other asset types.
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Hopwood House are property investment specialists, with a wide range of investment opportunities in the UK residential buy-to-let and student accommodation investment markets.
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Daniel Peacock