UK institutions will have doubled their allocation to property by 2010, ING Real Estate Investment Management chairman Robert Houston claimed this week.
Speaking at the Investment Property Forum/Society of Property Researchers seminar on the outlook for property and the economy this year at the Mansion House on Tuesday, an exceptionally bullish Houston predicted that institutional property allocations would increase from their present 7% to 15% by 2010.
Houston said every 1% increase in allocation meant an extra £20bn to spend on property meaning institutions would have to find another £160bn of property between now and 2010.
Some of this property may be overseas, as ING REIM’s survey of property fund managers, carried out at the end of last year, showed 40% looking at buying on the Continent, up from only 7% in 2002.
“Most actuaries agree there is a strong case for property,” he said. “We have seen our fund-of-funds business grow strongly in the past few years and expect it to grow from £750m to £1bn this year as appetite increases.”
Since falling from a 1980s high of nearly 20% to 4% in the late 1990s, institutional property weightings have grown to 7%, he said, and were set to keep rising.
His optimism was supported by fellow speaker Roger Bootle of Capital Economics, who agreed that “15% was a sensible property allocation”.
The ING survey found 92% of fund managers planning to hold or increase their property exposure in 2004, and 52% were optimistic about the year ahead, compared with 38% last year.
Only 2% expressed pessimism, with the rest uncertain.
He said property would become more popular as investors lowered the minimum return level they expected. Nearly half of those surveyed are prepared to accept a hurdle rate of return of 8% this year, whereas last year a similar proportion were looking for at least 10%. Houston also predicted that property returns would hit 12% this year as demand for property continued to force yields downwards. “We believe the prospects for the market are very sunny this year,” he said.
He estimated average yields could fall to 6.75% in 2004, from 7.6% at the end of last year.
Houston was unfazed by the prospect of rising interest rates, saying there was no evidence that rising interest rates had pushed property yields up in the past and there would be enough arbitrage between swap rates and yields to keep debt-driven buyers happy.
● Looking at the wider economy and the wider world, Roger Bootle said prospects for the UK economy looked solid.
He said he believed US and eurozone interest rates would stay level this year and that UK interest rates would rise minimally to 4.5% by 2005.
