Hot property

Living in the UK it is hard to spend a day without hearing or reading about the overheating property market. We are bombarded with stories about interest rates, gazumping and how it could all end in tears as first-time buyers struggle to come up with the goods to make the first step on the property merry-go-round. Some residents of Kensington and Chelsea enjoyed their house prices rising by £1 a minute last year and, despite the Bank of England increasing interest rates to 5.25%, the market is still strong. The commercial market is also enjoying movement with the £600m sale of the London's landmark Gherkin to IVG Immobilien AG, which owns EUR3.5bn (£2.35bn) of real estate and manages EUR13.9bn for third parties.

Overall the market is worth around £1.5bn of gross written premium and it is a highly competitive area where experience counts. Traditionally, managing agents were based in the West End of London but there has been an explosion of investment across the country.

There were a large number of broker team upheavals in 2005, with Willis being a proactive player in the market, lifting teams from both Heath Lambert and Aon. However, as experienced hands defect to rivals, brokers have been proactive in reinforcing their teams. Jardine Lloyd Thompson and Marsh have made great strides in strengthening. There are also some non-national specialists such as London-based Ascent and Manchester-based Reich Insurance Brokers. In addition to the big insurers such as Zurich and Norwich Union, smaller insurers such as Endurance are trying to make their marks in the market. Players such as Independent and Iron Trades did get involved in the market but had their fingers burnt - experience is key.

David Cooper, regional manager at London market property owners, Allianz Cornhill Commercial, and one of the defectors from Aviva, says: "Over the past few years the larger nationals have taken a bigger market share. There has been a move away from in-house teams and specialist brokers. In the nineties the nationals realised the opportunities in this sector and took a larger slice of business."

Demand

The demand for property is changing but at the moment the UK and Europe is having a mini-boom. According to Paul Jenkin, product manager, underwriting and pricing at NIG the demand for properties is closely linked to the performance of the UK economy as a whole.

He comments: "Activity in the key sectors of the economy such as financial services, manufacturing, retail, wholesale, leisure and residential all drive the demand for property. Each of these sectors has different market dynamics, which affect property values and rental returns." He continues: "Overall there is a mixed performance across the property owner's sector. London has been the first to experience a slow down in the market with both commercial and residential markets showing a flattening off or reduction in rental values."

Jenkin adds: "The rest of the country shows a mixed picture with manufacturing and IT-related properties showing a marked slowdown in activity, with overall supply exceeding supply exceeding demand. Office, leisure and retail sectors have performed better and provincial cities such as Birmingham, Manchester and Leeds have seen particular areas of growth." However, Jenkin is positive for the overall outlook of the market.

It is not only the UK that is experiencing growth. Investment in European markets is climbing rapidly. Although riskier, there is the potential to gain higher yields from more attractive interest rates. Richard Elliott, head of Zurich Property Investors, who is in the process of investigating opportunities in Barcelona, says: "The UK is a saturated market and the yields are higher outside, however, the risks are greater. Investors may not know the markets as well. In order to help, Zurich has created a 'mini-global program' which helps with the legal and tax implications of buying property abroad." Allianz Cornhill also taps into the overseas market with a team in the Gherkin, which provides access to its Allianz Global Network.

Trevor Fairweather, director of Towergate Commercial property underwriting, agrees that Europe, outside the UK, is becoming more attractive: "There is more investment in Western Europe, the Czech Republic, Slovakia and the Balkan States. Interest rates are going to be closer to 3% or 4% whereas in the UK it is 5.25%. The commercial yield is around 8% to 9% and you subtract one from the other, and therefore the margins are bigger." He adds: "There is less buoyancy in the UK market as it is a small island."

Elliott is keen to extend Zurich's proposition to the regions and cites, a network across the country that insures business with brokers such as Reich Insurance Brokers and is seeking to work closer with brokers in booming Leeds and Liverpool. Zurich plans to double its regional share from £40m to £80m and grow its overall share of the market to 18%.

Reflecting the trend across insurance, the market is continuing to soften and Elliott says competitors are "very, very aggressive". Although the rates provided by insurers can vary, as ratings are complex. He comments: "As the sums insured goes up, rates go up. It is more complex as there could be hundreds of properties within a portfolio."

Cooper says: "The main challenges are managing the underwriting cycle as rates have steadily fallen. There has been an absence of catastrophic losses and at some stage, claims inflation will run at a level where we can expect the market to turn."

Investors

The kind of client profile in property investing diversifies greatly. Small personal investors could have a portfolio of two residential properties, whereas pension funds, banks and insurers may diversify its range for leisure, office and retail across the country or internationally. Land Securities and British Land are the two largest commercial property owners in the UK, controlling billions of pounds of investments. Events such as the London Olympics create opportunities for investors to purchase new venues that could rise significantly in value.

Shaune Worrall, head of financial intermediaries at Lumley Letsure, based in Maidenhead, which runs the official British Insurance Brokers' Association let scheme, says: "There are new investors coming in all the time. The person who buys to let has become a cultural icon - it is the average man's idea of becoming a property tycoon."

Investors have become less comfortable with the stock market and pensions. Despite affordability challenges in property, the smart investor will sniff out opportunities. According to government statistics, there are 1.8 million assured short-hold tenancies in England and Wales. Richard Lamberth, managing director of recently acquired wholesaler AUL, which places its insurance through Axa, says: "Property investors have come to the fore in the past three to five years and have developed substantial portfolios."

From 6 April, all property owners, landlords and letting agents will need to hold deposit money in a separate government trust. Worrall comments further: "Brokers are expected to know about what is happening in the market, especially if they have a financial advisory arm. Unfortunately, the government has yet to release any information about how they plan to do this."

What to insure

Knowledge is key to providing quality insurance in this market.

Fairweather says: "If we are insuring an office block in London we would normally see one if it is worth more than £10m, however, if it was a warehouse using flammable materials then we would want to inspect anything over a value of £3m." Within major property portfolios there will be poor risks and, therefore, insurance professionals will need to take the rough with the smooth.

There are two strands of insurance, one from the owner and another from the tenant. From the owner's perspective, the rebuilding value, and the fixtures and fittings of the building are insured; other items will become the tenant's prerogative to insure. On a possible dispute there is a "designation clause" where the insurers would look into valuations and determine, for example, who was responsible for insuring the carpets. Fairweather believes this is a fairly simple process and disputes are resolved fairly swiftly and amicably.

Insuring property is becoming more sophisticated, as clients demand legal protection, rental protection and accidental damage cover. In the residential market, clients are demanding £100 excess maximums, whereas, £250 was common before. Flooding, such as tenants leaving taps running, is one of the biggest causes of damage along with theft of property. Engineering insurance is another key area and there are already large inspection arms of insurers. There could also be directors' and officers' insurance for residents associations.

Brokers can then decide if they want to become involved in claims. For commercial property, rent guarantee insurance is not possible to obtain, although claims for lost rent as a result of the premises being unusable could be negotiated.

Worrall says: "Customers need assurance that it is comprehensive and there are no gaps down the line.