Commercial property returns in the UK are set to improve in 2013 even though the economic growth for the year is likely to be slow, Property Wire reported on February 25. The industry website cited projections by Legal & General Property, UK’s third largest institutional property fund manager, which expects that prices for the market as a whole will remain stable throughout the year, in contrast to 2012 when the market fell about three percent.
Legal & General Property points to three key factors that will drive commercial property investment returns in 2013. First up is the efforts of central banks in Europe and beyond to stimulate growth, which have been factored into the company’s forecasts for higher economic growth. “This gradual improvement should translate into greater occupier confidence in bearing the cost of moving into modern, well located buildings,” said Rob Martin, Legal & General’s head of research. He explained though that the growth in absolute terms is relatively weak, which will likely result in the majority of new lettings being “moves from substandard, poorly-located buildings rather than outright expansion”.
According to Mr Martin, another factor generating optimism is the apparent easing in commercial real estate credit markets, with both American and emerging market banks along with debt funds and insurance companies “increasingly originating new debt capital to the sector”. Also, in recent months, British banks have been more willing to lend on commercial property, Martin added. He warned though that these positive indications should not be over played.
The third factor underlined by Martin is the valuation case. He explained that the risk premium which commercial property investment offers remains relatively attractive against historic averages.
Still a challenging market
Legal & General Property’s outlook provides a basis for optimism amongst existing and prospective investors looking to make a commercial property investment play. It appears however that conditions may not be equally favourable across all asset types in the sector. LGP warns that some sub-sectors will be struggling in the medium term, whilst other sectors and asset types will produce above average returns. LGP sees the higher-yielding sections of the office and industrial markets outside London as being amongst the strongest performers in 2013.
At the other end comes the retail sector, which LGP expects to perform below par in 2013. Several key factors are seen as likely to be responsible for the underperformance, including the growing pressure retailers are experiencing from e-retailing, the relative weakness of consumer spending and the increasing foray of supermarkets into selling non-food items. Rents need to be priced in such a way to allow bricks & mortar retailers to trade profitably, observed Martin.
The company believes that in London the retail market will continue to perform strongly, with the capital continuing to benefit from growth in international tourism. The strength of London’s retail market is a sustainable long term trend, Martin opined.