Commercial Property – A Tide Starting To Turn (Perhaps)
The tide is perhaps starting to turn with UK commercial property investment, with signs of new money coming in on the back of renewed mainstream lender interest in the sector. To the extent it’s happening, it’ll have been a long time coming for long-suffering landlords, who saw their access to bank finance dissipate almost overnight back in the awful winter of 2007-08. And for the exchange-traded funds with heavy positions in the sector and which witnessed a stampede for withdrawals, causing many to shut their doors. Today, commercial property remains around 35 percent off its highs of 2007.
Late last year the Financial Times reported that certain industrial conglomerates and investment banks were stepping up to the plate, drawn to the yawning gulf in commercial property financing and the prospect of solid if not spectacular returns. Insurers were also showing renewed interest, given the favoured status of commercial property loans on capital adequacy requirements under the EU’s ‘Solvency II’ regime, originally scheduled for commencement in 2013 but now deferred a year. More recently, FT has drawn attention to an observable uplift in investment interest in property.
!m(/uploads/story/190/thumbs/pic1_inline.png)The new focus on office and industrial real estate seems to be driven by an investor sentiment which has largely given up on the prospect of capital gains and is looking for solid – and safe – returns. Across all property types, investors would do better to stay in cash – IPD’s latest (June 2012) UK Monthly Property Index shows a return for the month of just 0.1%, all from income with capital growth remaining negative. But shed retail and take a longer-term view and a more positive picture emerges. Office is returning 6.4 percent for the 12 months to June and industrial 5.9 percent. Given the likelihood of near zero bank interest rates for the foreseeable future, and equities continuing their foray into negative territory, something around six percent is not to be sneezed at, especially if the investment is in top-end property with the proverbial blue-chip tenants.
The challenge is of course to get into that profile and not everyone is getting it right. Amongst the 60-plus property funds tracked by IPD, there are wide variations in performance. Standard Life Investment’s UK Property Trust (SLI) is currently the leading performer in purely UK plays – with 12-month returns running at 2.59% but a solid 26.47 percent over three years. To get better, it’s necessary to buy into European or Asian property. By contrast, Threadneedle’s UK Property Trust (LVUKPRA) is negative 15.74 percent for the 12 months to June and a very modest 2.05 percent up for the past three years. And there are lots of positions in between.
It’s very early days though – commercial property in the UK is still considered a risky play by many pundits and will remain so as long as the economy continues to stagnate. In its just-released Article IV consultation report for the UK, the International Monetary Fund gently urges the government to inject some growth stimulus into its continuing ‘austerity’ economy. Until Britons start spending again – with confidence – the businesses which occupy the £33 billion-worth of UK commercial property are going to remain hunkered down and property investment will stay off the shopping list of most investors.
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