London, 1st March, 2013
Residential investment continues to outperform inflation and commercial real estate according to the latest IPD UK Annual Residential Property Index, with returns from portfolios in the private rented sector for 2012 at 8.9%. These returns outperformed the 2.7% return from offices, shops and industrial units, and the 3.1% inflation seen in the UK last year.
This positive performance was driven for the most part, by the London market. Central London total returns were 10.1% while outer London (zones 4 – 6) returned 9.0%. Inner London (zones 2 – 3) was the best performing region in the UK and returned 10.7%.
Against the 4.2% return from bonds (JP Morgan GBI Global, UK 7-10 Year) UK residential property’s 8.9% total return compared well, though it was unable to keep pace with equities and property equities (MSCI UK), which had a strong 2012 and returned 10.2% and 30.5% percent respectively.
Stronger capital growth made up the greater portion of returns in central London, while values outside of the Capital decreased. Due to the price premium for central London property, income returns of 2.3% reflected a lower yielding and more prime asset.
The index, launched in 2001, gathers data from investors on the value of commercially let and managed residential assets, and the income generated from them, allowing owners and agents to analyse and compare market performance.
Income returns outperform inflation
When viewed solely as an income-generating investment, residential investment has continued to outperform inflation and the currently low yielding UK bond market. Income returns of over 4% outside inner London will be seen as positive news by investors.
With the effects of central London removed from the index, total returns of 6.3% still exceeded those obtained from commercial real estate. When central London is removed from the commercial real estate sample, returns slipped to just 1%.
Inner London attractive for institutional investors
London and the South East have driven overall performance, but for the growing number of investors seeking to invest in build-to-let, where homes are built to generate rental income over the long term, eyes may be on inner and outer London performance.
Extremely strong rental growth in inner London of 7.7%, has kept pace with capital appreciation of 7%, which has avoided further income yield compression despite significant price inflation during the year.
It is significant that inner London is the best performing area, where prices are determined by domestic occupier fundamentals. Inner London rented housing predominantly serves young professionals working in the capital.
Returns of 9.0% in outer London help support the confidence in build-to-let shown by an increasing number of larger investors. Significant backers include APG, the Dutch pension fund, which has recently invested £158 million into Grainger’s GRIP portfolio, and M3 Capital Partners, who have invested £200 million in Essential Living, a new rental-focused UK brand.
Regional polarisation continues
As with commercial property, the performance gap between London and the regions is widening. Unique demand factors, such as demographics and labour market dynamics, have pushed up values and rents in the capital, irrespective of economic difficulties elsewhere.
The dominance of London is highlighted by falling values outside of the M25. Notable value falls were recorded in the South East for the first time since 2008. However, rental value growth has remained positive outside of London, which has maintained yield levels at higher than 4%.
Phil Tily, IPD UK and Ireland Managing Director, said, “There is little evidence to suggest the gap between London and the regions will close this year, as the demand factors driving London remain strong. While in London it has been possible to invest and achieve a level of capital appreciation, as you venture outside of the capital, residential has become more of an income play, increasingly reminiscent of wider commercial property performance.
“Investors are buying into the sector for an income stream, not a purely capital play. The fact that so many serious players are now focusing on residential investment can only be seen as highly positive for the sector and future UK housing supply.”
Duality of the market: values in London driven by individual buyers
The prices of commercially owned residential properties are still predominantly determined by the vast owner occupier market. If the PRS market matures and a build-to-rent model is adopted, it will reflect more closely the commercial sector, where an ‘investment’ price is put on properties, not a price driven by owner occupiers.
However, due to the current restricted supply of large scale rental blocks, pricing continues to be derived through current market dynamics. This means that income yields will inevitably face compression in areas with high owner occupier demand. Total returns for UK commercial property rose in January to 0.4%, their highest in 12 months, according to the IPD UK Monthly Property Index.
Tily adds, “Property performance will always mirror that of the wider economy, but in spite of poor regional growth, as a sector, residential investment continues to hold up well, driven by a soaring London market. The unique fiscal and demographic factors driving property growth in the capital look unlikely to change in the near term, and this continues to foster interest among investors in the build-to-rent sector.
“There is growing activity in this part of the market and IPD is firmly committed to assisting and measuring the growth of the private rented sector, as investors look to diversify and hedge against their expenses.”
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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