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UK Commercial property
DANGER
SIGN 1: UK institutions have actually continued to be net SELLERS of UK commercial
property, dumping £128 million-worth more than they bought in the second
quarter of 2009.
DANGER
SIGN 2: Overall rental levels are still falling, dropping 0.5% in August.
And
most important of all, there’s the threat posed by rising unemployment.
Unemployment
stands at 8% already. If it hits 10% as has been widely predicted, it will mean
less demand for office and factory space, and less spending in the shops. More
tenants will go bust. That will cut demand for property, and will lead to further
falls in rents.
Since
the summer, we have been talking to you about the triggers that we believed would
indicate an imminent recovery in the UK property market. This was at a time when
conditions for commercial property were continuing to deteriorate but at what
we perceived to be a slower pace. As we predicted, there has been a noticeable
revival in the UK commercial property market over the past few months and a subsequent
improvement in the performance of property..
Capital values, as measured by IPD, rose for a third consecutive month in October.
In addition, flows into UK property funds recorded the largest quarterly increase
in two years, according to the Association of Real Estate Funds. Overseas buyers
have led much of this renewed interest in UK commercial property, enticed by favourable
exchange rates and relatively attractive pricing, but the level of interest among
UK investors has also risen sharply.
...
but limited stock is a challenge
However,
while interest in the asset class is undoubtedly growing and property funds now
have money to spend, buyers currently face a scarcity of prime quality stock.
Unlike the property cycle of the '90s, speculative development has been better
controlled during this cycle. This time round, property developers reduced the
supply pipeline when development funding largely dried up and economic conditions
worsened. And they have kept it that way for the last 12 months.
Meanwhile, UK banks and financial institutions have added to the logjam by holding
on to distressed assets that were seized at the height of the financial crisis.
It was widely expected that the banks would flood the market with these properties,
however, this hasn't happened. The banks have instead held onto these assets,
rather than sell at low prices, meaning a lack of acquisition opportunities for
cash-rich investors and property funds. This situation has given rise to some
competitive bidding situations for available properties, particularly in the London
offices sector, which is pushing yields lower and prices higher.
Unsurprisingly,
some commentators are concerned about the prospect of a pricing bubble and that
the UK commercial property could suffer a temporary setback - especially if prices
continue to rise without an accompanying up-tick in economic or rental growth.
Until a state of equilibrium returns to the supply/demand of UK commercial property,
the current situation will likely be self-perpetuating.
However, our belief is that the UK banks will encourage over-extended, leveraged
property clients to offer stock to the market as pricing continues to improve,
rather than flood it with a large volume of assets. And we still believe UK commercial
property is an attractive investment opportunity, particularly given the yield
advantage it offers over other asset classes.
