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How Have Property Funds Performed Since 2010
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To understand property fund performance since 2010, one must look back to 2007.
Investors in property development are presented with a very mixed picture in 2013. Several variables suggest it’s a tricky market – with a few bright spots.
It almost goes without saying that the past five years, since the financial crises of 2008, have yielded poor returns on investments in virtually all asset classes save for the countercyclicals (which include gold and its highly aberrant returns). The economic recovery – in the UK, the broader Eurozone, the US and elsewhere – has been spotty and irregular. In response, investors have migrated away from market-traded securities to real assets, including raw land and built property.
So what has happened with real estate in its various forms in the last two or three years, as the shocks of 2008 settled in and recovery began in fits and starts? The performance of real estate must necessarily be subdivided into its distinct sectors for a reasonable analysis, which is in many respects an apples-to-oranges comparison. Following is a hodge-podge overview of oft-cited indicators:
Housing prices are an indicator of not just land values but the economy as a whole, and yet several external factors confound drawing broad conclusions from “people are paying to purchase a home. By the fourth quarter of 2012, reports Savills, average UK house prices were still below their September 2007 peak. In real, inflation-adjusted terms that actually is a 24 percent drop.
So why is that not a clear indicator? Mortgage finance and an inability for would-be homebuyers to come up with an adequate deposit mean that there are buyers who simply cannot afford to get mortgages. In the past decade, the average first time buyer deposit requirement has risen from £12,000 to £58,000 – tough work when so many young people are struggling with employment and lower salaries. Fix the lending standards and perhaps there will be more movement in this regard.
Institutional investment in real estate is meaningful, given how the Pension Real Estate Association, which covers £1.5 trillion in assets under management, found that its members hold about 10 percent (£155 million) in real estate in one form or another. But a May 2012 study out of Maastricht University found that across the Eurozone the only indication of performance by assets in real estate is the allocation of funds placed into such investments (that is, returns on those investments are unknown). Growth in allocating funds to real estate investments leading up to 2008 was strong, but dropped by more than 30 percent by mid-2010.
House building is yet another indicator, which Savills reported near the end of 2012 as sluggish, but with several reasons for optimism. Starts are less than 55 percent of what they had been in 2007 throughout England, Scotland and Wales (however, Central London is a different story altogether, with prices and new construction climbing).
Land values as measured by Savills shows reason for optimism, with late-2012 growth of 0.4 percent of urban land in the third quarter of the year, and a 0.7 percent price growth for greenfield properties (in London, the quarterly growth was an outsized 4.6 percent).
Several media organizations offer up both criticism and optimism for investors in land, citing first the government’s Funding for Lending scheme, which was unveiled in the summer of 2012. Reporting in The Telegraph in January 2013 suggests the six-months-old program was not effectively delivering looser financing for homeowners from the government’s infusion of £80 billion in state-backed loans, however the full effects cannot be measured until at least a year into the program (by mid-2013). For homebuilders and land investors, the cost and slowness of the planning system is also thwarting activity.
The forecasts for strategic land development into residential property can be driven by a very different and powerful dynamic, which Savills calls “Generation Rent.” Priced out of ownership, the concentration of 20-34 year olds living in major metropolitan areas are settling into a rent-it mentality. While the largest landlord group are private individuals, who themselves cannot get adequate debt funding, larger organizations with cash are the more likely builders of to-let properties (i.e., building for renters). The demand is certainly there: a 7 percent increase in population in the UK between 2001 and 2011 has pushed a critical need for housing that is currently unanswered by woefully slow building during the recession.
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