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Bad debt to hit commercial property sector

Rathbones chief investment officer Julian Chillingworth has warned that there is more pain to come in the UK commercial property sector.

Chillingworth says before we see the bottom in the property sector, around £30bn of loans need to be cleared out by the banks on property companies which are no longer able to service their debts.

He says: “They will not want to foreclose on these loans but they will be under pressure to sort them out. The one thing the banking sector cannot afford is a drip of bad loans. They would rather write down a load of bad debt and then write back those for which they can achieve value.

Until the old stock is cleared out, it is difficult to see much progress and I think that will happen in the next 12 months.”

Property funds ranked top of the IMA sales statistics for October with net inflows of £367.5m.

Ignis Asset Management head of property Gary Hutcheson says he is cautiously optimistic about property in the next 12 months, forecasting a total return of 8-10 per cent in 2010. He says there is pent-up demand for property but acknowledges there is still a large amount of debt that needs to be refinanced.

Hutcheson says: “Banks are currently rolling over facilities in order to keep things afloat, something that will not last forever. It is doubtful, how-ever, that they will drop significant amounts of stock in the market for another three years or so.

“In the interim, stock that can be sold by the banks will be sold and this will act as a natural brake on market values. Property is now being recognised for what it should be doing – offering an attractive income yield and some prospect of capital appreciation in the medium term. Taken on those merits, and compared with low interest rates and gilt yields, property looks like an attractive investment for 2010 and beyond.”

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