The recovery is now so firmly in place that even a rise in interest rates appears unlikely to do much to dampen spirits.
More than two-thirds of the 500 real estate professionals surveyed in Lloyds Bank Commercial Banking’s and the Investment Property Forum’s latest Commercial Property Confidence Monitor said rising rates would not affect their investment intentions.
The bullish outlook is underpinned by expectations that property values will rise and the wider economy will continue to strengthen, offsetting the adverse effect of any increase in the cost of borrowing, according to Lloyds head of commercial real estate John Feeney.
“It is fundamentally about an improvement in the property market,” he said.
“A lot of our borrowers are telling us that they are seeing stronger performance in their underlying real estate portfolios, upward pressure on rents and strong demand from tenants.
“So there is a view that ?while a rate rise may have an effect on returns, there will be a countervailing force from increasing cash flow from property,” he added.
The headline figures highlight the extent to which the recovery has now taken hold; early signs of regional optimism picked up in last year’s surveys are now firmly in place.
More than 80% of respondents expected the market to perform better in the next three to six months – the highest level since the CPCM began in 2010 – with 67% predicting values would rise.
All of the major groups polled – which include fund managers, major, medium-to-large, and small businesses – recorded higher scores on the confidence index than in the previous survey.
However, the early signs of maturity in the London cycle could be emerging, with medium to large businesses in the capital the only group to show a dip in confidence – albeit a minor fall from 75 to 68.
“If you look at West End retail, for example, the yields are eye-wateringly low and there has been a big run up in rental growth in those areas.
“It is hard to know how much further that can run,” said Feeney.
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Alternative lenders woo big business
“Borrowers are accessing a broader range of funding sources than has ever been the case in the past,” said Feeney.
Bank debt remains the dominant source of financing. However, big businesses in particular have become significantly less reliant on it.
The number of major businesses borrowing from banks has fallen from 70% to 50% in the past 36 months, with alternative lenders taking up the slack.
SMEs have demonstrated a less radical departure from traditional financing. But 14% more of those polled in February this year said they anticipated using private finance than in August 2011.
“Alternative funding sources have become a permanent part of the real estate debt market,” Feeney said.
He said the move away from traditional banking had underpinned Lloyds’ strategy to shift to a distribution-led model, where large loans were no longer held on balance sheet as a matter of course and instead were distributed to other institutions in the manner of a traditional investment bank.
December’s De Montfort University UK Commercial Property Lending Market mid-year report found that non-bank lenders accounted for 15% of new lending, up from 13% in the first six months of 2013.
Regional buyers’ novel debt choices
The ongoing thawing of the long-frozen regions of the UK property market has presented borrowers with a choice of financing options for the first time in several years.
Lloyds and the IPF found confidence continuing to rise in the regions, up from 79 in August last year to 83 in the latest survey.
“It really is a story of very broad-based confidence,” said Feeney. “At this point in the market a sensible borrower with a decent asset is going to have funding options and there are very few corners to which liquidity hasn’t arrived.”
This liquidity is underpinned by a fanning out of tenant activity, with Lloyds clients experiencing rental growth in “a broad range of locations and for a broad range of assets”, Feeney said.
London respondents, by contrast, showed a slight dip in confidence, with an index fall from 80 to 76.
Regional debt markets were frozen for several years following the crisis. But once liquidity began to return last year, the rate of thawing proved remarkable.
Current transactions, including the in Manchester (pictured), which is being bought by Schroders, are expected to set new benchmarks for regional pricing.
The fund manager is seeking finance for its £132m purchase, announced earlier this month.
Resi rules the roost despite overheating fears
SME optimism about portfolio performance hit 66% among residential operators, compared with 59% for their commercial counterparts.
The same trend was evident among respondents’ attitude to risk, with 45% of SME resi developers expecting to move up the risk curve compared with 29% of commercial SMEs.
The figures present a marked contrast to widespread fears that the housing market may be overheating, which have drawn comment from the Prime Minister down.
Feeney said Lloyds’ concerns were limited to parts of the prime central London market, where values have risen most dramatically. He pointed out that many regional housing markets remained below their pre-crash peaks.
“Right across the house building universe we are seeing a lot of positivity,” Feeney said. “I think the bubble and the fears of a bubble are largely distorted by a small pocket of London where prices have moved up significantly and valuations are eye watering.”
House building polled as the sector with the best prospects across every business size and every region apart from London and Wales, where offices came out on top.
