Investor confidence is returning to commercial property

Feb 3 2010 Liverpool Daily Post

CAPITAL values in the UK commercial property sector have fallen some 40% since the mid-2007 peaks.

However, there are some tentative signs that more attractive valuations, combined with a return of risk appetite, have led to a gradual return in confidence in the sector.

The weaker pound has also made the sector more attractive to foreign investors.

The recent rise in values and the surge in popularity of the sector is due to investors becoming less risk-averse, as they seek out opportunities.

However, most are still chasing prime, well-let assets and this correction is still a return to fair value, rather than the start of a new asset price bubble.

This activity is predominant in areas such as city offices, were a return of rental growth is a realistic short-term possibility; demandŠis generally up as tenants look to take advantage of the deals and incentives now on offer, and the availability of quality space is falling. This represents a short, sharp recovery in prime UK capital values.

Thereafter, we are likely to see a broadly flat yield for a number of years as the banks go through a two to five-year de-leverage phase, selling down their property exposure to the returning institutional investors.

Incidentally, a number of commentators have suggested such a rise in capital values represents a bubble.

But the unprecedented 40% fall in capital values pushed the average yield towards 8%, and an average property yield in the region of 6.5% would still represent a significant premium over benchmark yields such as gilts.

We are now at the stage where rental values are finally starting to bottom out, after the past 15 months of declines.

However, despite the cautious optimism, investors would do well not to forget the lessons of the credit crunch years, where too much money went into illiquid assets like commercial property.