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Cheap side

There are some signs of positive sentiment returning to the commercial property market.

This month, Swip re-entered the commercial property market with the purchase of three new properties for its property trust’s portfolio.

The rationale behind Swip’s move is the identification of what it describes as excellent buying opportunities in the still uncertain commercial market. Swip property trust manager Gerry Ferguson says: “Swip believes that the time is right to re-enter the market and is taking advantage of some excellent opportunities that meet our criteria of prime quality assets in good locations with a strong income stream. We continue to assess the market for potential purchases with a view to acquiring further properties in the near future.”

Earlier this month, Reita highlighted that from the low point on March 9 this year, property shares in the UK had recently rallied by over 40 per cent.

Reita also released its quarterly property investment perspective which showed over 90 per cent of respondents from its panel of representatives from 24 property and investment organisations agree that positive sentiment towards UK property and investment conditions had increased over the last three months, representing the highest recorded score for positive sentiment since Reita’s panel research began in March 2008.

The organisation argues that, having previously been priced for Armageddon, property shares are now simply priced for a recession and are now closer to where they were last September.

Perhaps most surprisingly, there seems to be some interest from investors for commercial property.

Cofunds recently reported positive inflows to commercial property funds in the second quarter of 2009 and the Investment Management Association also reports positive inflows to commercial property for the first time since April 2008.

Cofunds says the interest is coming from the retail sector rather than from institutional investors and the IMA figures also report that it is an increase in retail inflows that is balancing out institutional redemptions. This has prompted some surprise from IFAs over the fact that some retail investors seem to have recovered from the sharp fall in property values and the spate of property funds that had to suspend redemptions in the last 12 months.

Perhaps some investors consider that the worst is now past for property funds. IPD puts the property peak to trough at -44.1 per cent, the 12-month change in capital values at -30.8 per cent and while its June UK monthly index indicates British commercial property markets have marked the second anniversary of consecutive monthly declines in capital values, it was with the shallowest fall since August 2007 at -0.9 per cent.

But perhaps unsurprisingly, advisers seem unconvinced there is not more pain to come. Many IFAs are prepared to continue to monitor the opportunities but maintain it is too soon to steer clients back towards commercial property.

Chelsea Financial Services director Darius McDermott is not persuaded that valuations will not fall further. He says: “Commercial property is a more general indication of the health of the UK economy and the UK economy is not very well. What value is there in a warehouse in the North-east at the moment, for example, with people losing their jobs and losing their businesses?”

For McDermott, the demand that might justify greater confidence in commercial property is just not there.

Hargreaves Lansdown research director Mark Dampier is inclined to agree. He is not confident in there being the buyers that might fuel significant demand for commercial property and cannot believe that many banks would be prepared to finance volumes of purchases even if there were. Liquidity challenges remain a significant obstacle to the recovery of the sector.

The more positive take on where we are in the cycle is that the commercial property looks better value than it did, although Dampier continues to recommend a wait-and-see approach for the time being: “Is UK commercial property looking cheap now? Yes. Could it be cheaper in 12 months? Possibly. By waiting to see if the market gains momentum, you might lose out on the first 1 or 2 per cent but I still would not move now.”

Around the time it was yielding double-digit returns, commercial property was seen by many as a safe haven for more cautious income-seekers. That reputation has been revised but, in the longer term, advisers believe the arguments for using commercial property for income remain.

McDermott says: “It will not be right for every client but there are still reasons to consider commercial property for diversification purposes and as a long-term alternative income stream. Some clients might prefer to go for commercial property rather than leaving sums earning 1-2 per cent in building society accounts.”

He believes there is an argument for some clients to look towards commercial property for capital growth. He says: “There could be potential long-term capital growth, given where certain valuations are and if interest rates remain low.”

Where clients might be well served by considering commercial property, careful fund research by advisers is critical. In particular, advisers should investigate not only the type and quality of the properties within the portfolio – including understanding the mix between residential, retail and industrial and also how far the fund has managed to retain its prime holdings throughout the troubled times – but also tenants.

By checking that secure tenants, such as local authority or government clients, are in long-term contracts to rent the properties owned by the fund, advisers can be confident that there is less risk of void rental periods and diminished returns for their clients who may also need some convincing of the reasons to get back into commercial property just yet.


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