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UK property outlook stabilises

17th January 2005 | back to article listings BACK    print this article PRINT

The overall outlook for the rated UK property companies is stable, reflecting the firmer underlying tone of the commercial property markets balanced against a number of residual uncertainties, according to a new report.

The credit profiles of the larger UK property companies stabilised overall during 2004, Moody's Investors Service said in its new Industry Outlook.

The Central London office market, a key component of many of the larger companies' portfolios, is healthier than it was a year ago, the report said.

"In the West End, in particular, re-emerging occupier demand for relatively scarce prime office space has pushed rents higher," explained Niel Bisset, a Moody's Senior Vice President and author of the report.

"Letting activity in the City market has also picked up, although the large stock overhang resulted in rents remaining flat, at best, over the year."

In the retail markets, occupier demand for relatively scarce space has underpinned positive rental growth, which remains stronger for out-of-town warehouse space than for in-town stores.

Investment markets were buoyant throughout 2004, allowing many of the larger property investment companies to report some underlying valuation uplift with their interim results, a development which should be extended at full year reporting, in Moody's view.

With little growth in net debt over the period, the upward pressure on corporate gearing levels seen in 2003 is likely to have eased somewhat.

Moody's cautions, however, that these positive developments are moderated by certain risks on the downside.

First, any slowdown in consumer spending, following the interest rate rises of the past year, would be likely to weigh on occupier demand for retail space and potentially investment demand, leading ultimately to weaker valuations on retail portfolios, which have so far helped offset negative valuation trends on City office space.

Secondly, the stock of available City space remains relatively large, characterised by over-renting and with voids at over nine per cent. Certain investors therefore caution against expecting real growth in City rents before 2006.

"Finally, any further interest rate increases that materialise in 2005 might reduce the relative attractiveness of property investment unless they are offset by underlying rental growth and could cause yields to rise, with a negative impact on portfolio valuations," Mr Bisset added.

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