First Property Group plc. Commercial Investment Real Estate Investing through the cycles

Transcription

1 First Property Group plc Commercial Investment Real Estate Investing through the cycles

2 Table of Contents Liquidity: Property vs. Equities vs. Bonds Costs of Buying Commercial Property The Need for Yield Income Return Prime London vs. Prime Warsaw Yields Obsolescence Green Issues/ Sustainability Inflation Hedge Debunked Conclusions First Property UK Track record

3 Liquidity: Investment Property vs. Stock Market vs. Gilt market 100% 1000% UK Gilt Market (7+ years) Value Traded vs Avg Annual Amount in Issue 800% 600% 010:,900 billion [517% of 564bn market value] UK Stock Market Value Traded vs Market Cap 400% 00% 0% 010:,500 billion [146% of 1,70bn market value] 010: 8 billion [3.5% of 813bn market value] UK Property Turnover vs Investment Market Size 3

4 Cost of Buying Property The cost of trading property is relatively high: 4% stamp duty 1% agent s fees 0.8% legal and valuation fees 5.8% The cost of trading publicly quoted stocks is relatively low: 0.5% stamp duty 0.5% broker s fees 0.75% Just to break even on an investment, a property s value must increase by at least 6%: But relying on capital gain for such an inherently illiquid asset may be risky. Or over a 5 year hold period for UK prime Property, more than one year s income is lost in acquisition costs. These frictional costs have to be addressed. 4

5 Yield Investing Through the Cycles The Need for Yield 10.00% 9.00% Yield gap gone for secondary properties 8.00% 7.00% 6.00% 5.00% 4.00% 3.00%.00% Yield gap reversed for prime properties Average Secondary Yields Average Prime Yields Bank Base Rate 1.00% 0.00% Mar 1999 Mar 000 Mar 001 Mar 00 Mar 003 Mar 004 Mar 005 Mar 006 Mar 007 Mar 008 Mar 009 Mar 010 Mar 011 Source: CBRE, Bank of England Yields are average of office and retail yields 5

6 Yield Investing Through the Cycles Capital Value Volatility 8.0% 7.5% 7.0% 6.5% 6.0% 30% reduction in value 11% increase in value Poland (Warsaw) Prime Yields 5.5% 0% increase in value UK Prime Yields 5.0% 4.5% 47% reduction in value 4.0% Source: CBRE UK Prime Yields are average of London office and UK prime retail yields. Poland (Warsaw) Prime Yields are average of Warsaw office and retail shopping centre yields 6

7 Income Return as % of Total Return % Capital Growth Income Return Total Return Years 10 Years 5 Years 3 Years Source: Investment Property Databank (IPD) All Property UK Universe Over the longer term income is the main driver of investment returns 7

8 Obsolescence Simple buildings are best: Retail warehousing; Functional offices; Warehouses. Need to keep costs/ rents low, especially in this environment. Simple/ cheap construction allows this. Old buildings in prime locations can be better than Class A buildings in prime locations. Often better to buy assets which have already aged, than brand new. The above dovetails with high yield approach. 8

9 Green Issues/ Sustainability A lot of attention to this subject recently. It is in fact a small part of a property s costs. Key is overall cost to tenant: rent and services charges, not service charges alone. Service charges are a small percentage of overall tenant costs. The economic effects are of crucial importance, particularly at the moment. Regulatory changes may influence this but not likely. 9

10 The Inflation Myth Commercial property is not an obvious hedge against inflation. Supply side led inflation is BAD for property. Rampant demand led inflation is ultimately BAD for property. Mild demand led inflation is good for property. 10

11 Conclusions Property is illiquid and expensive to transact. The only sure way to overcome this illiquidity and expense is to target high yields. There must always be a gap between the cost of funds and the yield earned on property. Prime property is low yielding and can be very volatile. There is a bubble in UK prime property. Sustainable high yields are likely to be less volatile. High yields cushion capital value movements. State of the art properties can only depreciate. It can be better to buy buildings which have already gone through this process or are simple in nature. Green issues are of subsidiary importance when assessing returns. Property is not, per se, an inflation hedge. 11

12 Average UK Yields (CBRE) Investing Through the Cycles First Property UK Track Record 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% Sale (with the number sold) Purchase (with the number purchased) 5.5% 3 5.0% % Mar 000 Mar 001 Mar 00 Mar 003 Mar 004 Mar 005 Mar 006 Mar 007 Mar 008 Mar 009 Mar 010 Mar 011 N.B: Where no number is provided only one property was transacted Average UK yields are the average of prime and secondary office and retail yields (source = CBRE). 1