Let's get positive: The worst of the commercial property price crash may be over

Published 07th Sep 2009

A consensus is forming among analysts, fund managers and financial advisers - it is time to be positive again about the devastated commercial property sector. At the beginning of 2007, commercial property funds - which pool investors' cash to buy office blocks, warehouses and other such buildings - were attracting more money from private investors than any other type of fund.

But they were pouring money in just before everything went wrong. Five years of stellar growth in property values from 2002 to 2007 was wiped out in 18 months between July 2007 and the beginning of this year. Marcus Langlands Pearse, director of property at fund manager Henderson New Star, describes the period as 'the most brutal and rapid correction ever'. But the latest research indicates that the worst is over.

IPD, the authoritative supplier of data relating to property, says the most recent figures (for July) show that values of certain types of property are rising for the first time since 2007.

Overall, UK commercial property values are poised to 'go positive' for the first time in 25 months and rents are falling less rapidly. A number of factors are driving the trend.

YIELD: The base rate is still 0.5 per cent and returns on cash are correspondingly low. But the rent paid on the average UK commercial property, as a percentage of current, reduced property values, equates to a yield of eight per cent, proving attractive to income-seekers.

Gerry Ferguson, who manages the £1billion UK commercial property fund for Scottish Widows Investment Partnership, says: 'The yield is historically high and that remains a major pull.' He is about to spend £60million of investors' money on a shopping complex near Edinburgh where annual rents equate to more than six per cent of the price.

CURRENCY: The pound has slumped since the onset of the credit crisis. This, coupled with the fall in property values, means a London office block is as much as 60 per cent cheaper today than in 2007 for a euro investor, according to Langlands Pearse.

INVESTOR DEMAND: Institutional investors in search of income, such as pension funds, companies specialising in buying distressed assets and pure property companies, are prowling. This has helped prices stabilise.

IPD economist Dr Ian Cullen says: 'We see the results of valuers' responses to several thousand properties every month. There is a long way to go to show strong, positive demand, but undoubtedly the figures suggest a change in sentiment.'

TENANT DEMAND: This is weak but improving. Ferguson says: 'Rents are still falling and occupier demand remains thin.' But if quality tenants are in place and don't go bust or default, most rental contracts operate in the landlord's favour. They may dictate, for instance, that rents can only be negotiated up, not down, and may tie tenants in for long periods.

So how do investors buy commercial property? Private investors can choose from a range of unit trusts that own commercial properties directly. By buying units in these funds they effectively own a fraction of the underlying offices and shops.

The best-known UK funds are Aviva Investors Property, Swip Property and Henderson New Star UK Commercial Property, each worth well over £500million.

Yield is important, but investors should also seek a spread of property types, a vacancy rate of less than five per cent and an average lease length of ten years or more. Buildings cannot be bought and sold quickly and funds that own properties directly often stop investors from making withdrawals when the market performs poorly.

An alternative is funds that invest in the shares of property companies, in the UK or abroad. These funds can always be traded, but they can be volatile.

One of the best-known funds is Schroder Global Property. The fund was launched in December 2005 and initially soared, only to crash in 2007. By late 2008 an original investment of £10,000 at launch would have dropped to £6,000.

The past six months, however, have seen an astonishing 50 per cent bounce. An investor at launch would now be in the black again.

Andrew Cox, 28, who lives near Wantage in Oxfordshire, has invested in the fund since 2006. Andrew, who was a Naval officer until May and is looking to work in shipping, is sanguine. 'If I'm honest, I probably underestimated how volatile this sector could be.

But the last two years have taken everyone by surprise, not just me,' he says. He plans to hold the fund for at least another four years. 'I'd say I'm down, but I'm confident I'll see the value return,' he says.
When to buy? The rule is, don't trust your instincts

Buy at the top or buy at the bottom? We all know what we should do in theory, but in practice our instinct as investors is to buy only after gains have been made (at or near the top) and to sell when we have lost money (at or nearer the bottom).

No one can say whether UK commercial property has reached the bottom, but it is decidedly cheaper today than at its July 2007 high, as this graph shows.

Unfortunately, most private savers who have commercial property exposure today made their investment in 2005 and 2006, just before the crash. It will be a long time before their losses are recovered.

Phil Wagstaff, of asset manager Gartmore, says: 'Private investors too often make the mistake of buying something when it has gone up for several years. But if an asset has gone down a lot, they steer clear or sell. We saw this with the craze to invest in technology stocks just before the crash of 2000. And we saw it in the run-up to the credit crisis with the craze for commercial property.'

Source: ' Daily Mail '

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