By ROBERT HARLEY 11/01/2008
The UK listed property sector experienced a pronounced change in sentiment in 2007 to end the year down 35%. Certainly what seems to have caught investors by surprise is the speed and extent of the correction to date. What was initially perceived to be a re-pricing of the asset class after several years of strong returns, has since been reinforced by events in the credit market, making the adjustment process all the more painful: banks have become more discriminatory in their lending, resulting in a collapse in transactional volumes; whilst breached banking covenants and investor redemption's have brought forced sellers onto the market.
The falls that have been evident in the listed property market are exaggerated by the geared nature of the underlying listed property companies and the tendency of the stock market to over / understate future expectations. The ungeared bricks and mortar property funds adopt more of a rear view mirror approach to valuations, consequently they tend to lag the listed market and avoid some of the valuation extremes associated with it. We believe market conditions suggest they may have slightly further to fall, although there are signs that cash rich investors sitting on the sidelines are starting to see value close to current levels.
Industry pundits are also keen to point out that the current sector fundamentals and economic backdrop are far more supportive relative to conditions prevailing at the time of the last property crash in the early 1990s, which was characterised by high vacancy levels, high real interest rates, and high unemployment. We have some sympathy with this opinion, but at the same time, believe much will depend on how quickly there is a resolution to current impasse evident in financial markets; on a longer term view the sector is clearly offering some value.