Despite the fact that the UK property sector increased by more than 10% during 2013, Don Jordison, the chief of Threadneedle’s property division, believes that the return on UK property will be even greater in 2014. This is certainly a very positive statement when you bear in mind the value of UK property has increased significantly over the last couple of years and many experts have been calling for a slowdown/correction in the short-term.
So, what is behind this very positive statement on UK property and could we indeed see an improved return during 2014?
Tailwinds affecting the UK property sector
While headwinds will obviously impact the growth in any investment sector, tailwinds tend to speed up the underlying trend. Therefore, it was interesting to see that Don Jordison, manager of the company’s £555 million Threadneedle UK Property fund has “never seen so many tailwinds” in his 30 year property career. So what exactly does Don Jordison see that so many other property experts seem to be missing?
Quote from PropertyForum.com : “Are international investors taking advantage of toxic bank assets?”
While his comment about renewed appetite for UK property and a renewed appetite for risk are fairly well known, what exactly will push the UK property market further in 2014?
Supply and demand
Even though some experts believe that the supply/demand ratio is now moving back towards equilibrium it is interesting to see that Threadneedle still see a combination of low supply and money that “needs spending”. The low supply issue may be specific to certain parts of the UK although there is no doubt that many investors see property as a good long-term home for their funds. This is perhaps one of the reasons why so many overseas investors are now looking towards the UK property market?
One factor which is often overlooked is that the net yield on UK property is currently running at around 6.1% which compares very favourably to gilt yields which stand at 2.75%. This positive spin on income yields is obviously impacted by the historically low UK base rates and the fact that a 6.1% net yield on UK property looks very attractive from so many different angles – inflation, etc.
Which areas of UK property are tipped to perform best?
George Shaw, the manager of Ignis Asset Management’s £1.2 billion UK property fund, has suggested investors should look towards office properties. He believes that this particular area could be one of the better performing subsectors of an overall buoyant UK property market. Indeed his company is so confident in the performance of UK office assets during 2014 that it recently increased its forecast return to a staggering 15.5%.
It would be foolish to suggest that the UK economy is totally clear of any headwinds caused by the worldwide economic downturn which began in 2008. However, it would also be foolish to suggest that the UK economy is not one of the strongest in Europe. Indeed some optimists believe that the UK economy will challenge the size and influence of Germany’s economy over the next 10 or 20 years. On this basis, it would seem fairly obvious that an increase in business activity will eventually lead to an increase in corporate activity, for small, medium and large businesses, which will impact upon the availability of office property and values.
These are certainly very optimistic noises from some of the U.K.’s most experienced property investors which should make many people sit up and listen. Whether or not you see the UK property market as overvalued in the short-term there do seem to be a number of “tailwinds” which will support rising prices for the foreseeable future. Perhaps the major turning point will be the eventual increase in UK base rates which will force investors to recalibrate the value of their investments.