15th December 2010
Yet Mike Slade, veteran property investor and chief executive of Helical Bar, has said that it is time for investors to ‘buy like hell' given the current valuations and yields available from commercial property.
Slade's comments came as Helical Bar raised £29m in a rights issue to pursue ‘new compelling opportunities in the real estate sector'. He and his fellow directors put in £1.1m of their own money to support the issue.
Slade believes that a combination of banks sorting out distressed portfolios, over-leveraged private property companies, and institutions that need to dispose of assets to fund new deals is creating some good deals for cash-rich investors. He also says that he has never seen such wide spreads between borrowing costs and income yields, up to 8% in some cases.
Someone clearly agrees with him. The rights issue was substantially over-subscribed. However, there were many who didn't: bedfordfalls thinks: "This cheery chappy clearly thinks that an economic upturn is just around the corner. I beg to differ. 2011 will be a filthy year for Britain economically and it will be at least a couple of years beyond that before we see the beginnings of real growth. Mr Slade has called the turn a year or so too soon. I wouldn't touch commercial property with a bargepole at the moment, however "cheap" it appears to be."
Patrick Sumner, head of property equities at Henderson Global Investors, is not as bullish as Slade, but believes that weak sentiment towards the sector has thrown up opportunities. In particular, he likes the central London office market, as financial institutions have largely recovered and are now looking to expand and move leases.
Sumner also believes there is a wealth of opportunities globally. Yields on REITS in the US, for example, have now reached 4.5% with many of them trading on substantial discounts to net asset value. He believes that the biggest problem faced by the sector is investor sentiment and, while yields will support prices in the short-term, until economic and rental value growth resume, the sector is unlikely to see a significant turnaround in performance.
The sector's biggest advantage may be its yield. There has been talk of a ‘scramble for yield' in 2011 as investors clamour for high yielding assets. Property is unlikely to be completely over-looked, as this article in the FT suggests. It quotes Merrill Lynch Wealth Management's annual investment outlook: "UK commercial property is again becoming an attractive source of income. Real estate yields can now deliver returns more than four percentage points higher than equities and more than six percentage points higher than inflation-protected bonds."
That commercial property investment feels so uncomfortable perhaps suggests that it is the right time tentatively to re-examine the sector. Sentiment has a hill to climb, but investors may overcome their nerves with the lure of higher yields.