Lloyds Banking Group calls end of UK property recovery

By James Wallace - Tuesday, August 09, 2011 14:00

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Lloyds Banking Group is calling an end of the two-year unbroken UK commercial property recovery over the second half of the year, predicting values in 2011 will be two percentage points lower than last year.

The semi-nationalised bank – which announced last Wednesday that is has completed £1.8bn in property sales over the first six months of the year – said in its six-month results: “Both residential and commercial property prices are expected to end this year 2% lower than at the end of 2010, and then rise only very slowly.”

Since the third quarter of 2009, UK commercial property capital prices have climbed 20.5%, according to IPD Quarterly Property Index.

This year has seen the pace of capital appreciation over the first half grind to a stuttering 1.4%, according to IPD. On which basis the fall in values over the next six months, based on Lloyds’ prediction and IPD's record of six-months capital growth, would amount to a 3.4 percentage points fall.

This contrasts with RBS property derivativies' implied pricing for the full calender year where alues are expected to rise by 50 basis point. Annual total return, accordng to implied derivatives pricing, stands at 6.75%.

Last week, Lloyds Bank Corporate Markets’ Commercial Property Confidence Monitor reported that four out of five (82%) “financial decision makers” intend to increase their exposure to UK commercial property in the next three to six months – with a notable bias in favour of London.

The survey, in association with the Investment Property Forum, revealed that less than half (46%) of medium/large businesses and a similar proportion of fund managers will use bank debt to fund their investments. This rises to almost two-thirds (65%) for major businesses, while just over a quarter (27%) for small businesses.

The quarterly survey tracks 449 financial decision makers across the property world on the sources of funding they expect to use in the next six to 12 months.

Lynda Shillaw, Lloyds Bank Corporate Markets’ managing director of corporate real estate, said: “This represents a fundamental shift in the dynamics of property funding. Three years ago we would have expected 80-90% of the market to be relying on bank lending.”

Shillaw added: “Investors can consider a number of funding solutions to unlock investment and refinancing opportunities and we have seen activity in 2011 in the European bond markets, the US private placement market and commercial mortgage backed securities.”

jwallace@costar.co.uk

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