Offshore Capitalist

Property – Prepare for the pick-up?

By early this summer, average commercial property prices had fallen by more than 40 per cent from their peak in June 2007, according to the Investment Property Databank (IPD).

Recent data, however, suggest the worst may be over, with evidence of prices stabilising and renewed competition among buyers. This month, the IPD reported that UK commercial property prices rose 0.2 per cent during August, the first monthly rise in more than two years. Could this mark the start of a turning point in the fortunes of commercial property?

The basic economic rule of supply and demand has led to the beginning of a stabilisation in UK commercial property prices. Open-ended property funds – at the time the largest stock supplier to the market – have seen outflows evaporate, putting an end to property fire sales.

Similarly, listed property groups have found a stock market with a fresh appetite for rights issues – the equity capital raised should help encourage banks to roll-over their loans to these groups. Private buyers have now joined institutional funds and overseas buyers in investing in commercial property for its income profile in response to low cash deposit returns.

In its August report, CB Richard Ellis noted yields on prime City of London offices, which had been pushed out to 6.75 per cent, have narrowed back to 6.5 per cent as competition pushed up property prices. As a result there have been upward valuations on many property portfolios in recent months.

Gains for the market in the near term are, however, likely to be tempered by a weak rental market as vacancies continue to rise because of development stock and second-hand space coming on to the market. There is also the overhang of property which has ended up on banks’ books because of breached loans.

Comments from bankers, however, suggest they are prepared to accommodate borrowers. They are also assuming the role of reluctant landlords in recognition of the fact they stand to be the biggest losers from flooding the market. Moreover, their reticence to lend, while slowing the recovery from buyers, also means developers have less access to capital, and this, in turn, will improve what is an already relatively restrained development pipeline. Rents, therefore, could rebound faster this time because the pressure from excess space will be less than in previous cycles.

With buyer interest in UK commercial property now ignited, the flame is unlikely to be extinguished – particularly if the nascent economic recovery can hold traction. Where else can an investor achieve income yields of 6 per cent or more on a tangible asset that has strong potential for capital gain? The key for investors in UK commercial property, however, is to ensure they are invested in a well-diversified portfolio of properties with good-quality tenants on long leases. That way, they should be well positioned to participate in the expected recovery.

via – Special Report: Property – Prepare for the pick-up.

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