Commercial Property

12th August 2010

The IMA Property sector has recovered substantially from its lows and is up 15.8% over one year, but those who see a bleak future for the economy continue to see a bleak future for commercial property. How are the fighters positioned?

In the blue corner is BNP Paribas Real Estate. Its most recent report into the sector claims that values will not recover their 2006 values for another 15 years. It says that capital values are likely to stagnate from their current position until at least 2012 with only prime London property bucking the trend.

This view finds some support on the Motley Fool. Apdavidson says: "Property – commercial and domestic – is set to collapse along with most other Western asset prices once deflation takes hold."

He quotes Full Circle guru John Robson, who has said: "The outlook for asset prices is truly terrible. If one takes into account the dearth of credit at the moment, and then look at 1971 salary-to-mortgage relativities versus today, you're looking at a house-price correction of well over 30%. As for the commercial property market, the sheer size of the problem is yet to be understood."

But this view is summarily dismissed by wavering in the red corner: "It all boils down to whether you can find a tenant for your property…

"The strength of the commercial property market is intimately linked to the fate of UK industry and commerce – "values" are irrelevant. It does not concern me whether a particular property is "worth" £500K or £750K, what concerns me is having a tenant. It is that simple. Land values and possibility of development have been devastated.

"So why did I buy some land last year for £2.5 million? Oh, yes. I remember, it was the £225,000pa rent from United Utilities for the next six years."

Mark Callender, head of property research at Schroders, says that looking forward, property should again begin to provide a strong diversifier to equities. He expects the yield on UK property will remain steady over the next few years at between 7%-8% assuming enthusiasm for assets remains positive but measured.

Henderson has also been using low capital values to snap up bargains. It spent $25.4 million on a 240-unit apartment complex in North Carolina – The Pointe at Chapel Hill Apartment Homes. Schroders and Henderson are not the only asset managers to see value in the market at the moment.

The commercial property sector has traditionally been boring, offering a stable, non-correlated income and a steady appreciation in capital values.

Investors should be hoping that it is neither on its knees nor about to soar, but instead returning to normality.

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