On the catwalk of UK property, which of the big brands are we going to see making like-for-like investment in the sector? And who’s going to be exiting the market before Christmas 2014? Pastel and pleated might be in for spring on Bond Street but, with assets trading at as low as 2% initial yields, will the most famous shopping street remain a magnet for overseas money? And is equity still the new debt, or will 2014 see more competitive terms coming out of banks and debt funds? So what’s “in” on the debt side? We will continue to see bond and convertible stock issues as cheap mid-term sources of finance. Derwent London , hot off the mark in 2014, has already tapped the US private placement market, securing 15- to 20-year money at rates of around 4.5%. If you – like me – are in the camp of rising swap rates, in a few years’ time this will look like amazing pricing. Also on the rise will be debt funding from UK institutions. These, with more flexibility around asset class and term, will boost their market share this year. “Out” is mezzanine financing. With increasing LTVs in the senior debt market and rising valuations, many investors will side-step mezzanine financing with its eye-wateringly high target returns. That means that a number of funds which have raised capital over the past couple of years will either have to drop their targets or sit on a lot of cash and dilute performance. Traditional lending banks are also likely to lose market share unless they trade up the risk curve, for example by going further afield in terms of location. For those willing to price development debt sensibly at this point in the cycle, there are deals to be done. As to sectors, logistics is in. The Christmas trading results for retailers highlight the importance of online strategy, with a record 19.2% growth in internet purchases in December. In contrast, secondary high streets are out, with significant lease expiries, low levels of reletting and another wave of bankruptcies bound to come. Topping the scoreboard for 2014, though, are “alternatives”. This will be the year that the private rented sector finally comes home. Long-term liability matching and a search for inflation-proof assets will have UK institutions going long on infrastructure, and the impact of long-term demographics will see interest building in healthcare. In Europe , Ireland is making a comeback. Having proactively responded to the disastrous financial predicament it found itself in in 2009, absorbing material cuts in the public sector without the entire population feeling the need to go on strike, it has been rewarded with tumbling pricing on their recent bond issue. This has translated into the property market, with Green REIT’s successful IPO last summer being the first clear indication. The unwinding of some dismal lending decisions by the Irish banks is going to take a long time but, in the meantime, we are seeing a resurgence at the prime end of the market, evidenced by the strong bidding for Dublin’s Central Park business park. Contrast this with France , where President FranÇois Hollande has done everything he can to decimate the economy, from labour laws and the massive dominance of the public sector, through to his slightly watered down version of a 75% top rate of tax. Frankly, jumping on a motorbike to see his mistress is a good thing if it keeps him away from further economic damage. In terms of money flows, Far Eastern players seem to be on an unstoppable roll. There is no wonder that David Cameron and Boris Johnson are courting them; after all, how else would we ever see significant sums of money coming together for the parts of London most in need of regeneration? US money will also still be around as banks continue to delever by selling their non-performing loan portfolios. So who’s out? It’s a brave call, but I wonder if some of the smart money might start thinking twice about London residential given how hot that sector has become.
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