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Commercial enterprise

The UK commercial property market seems to be turning a corner, with managers of both property shares and bricks and mortar funds feeling more positive about the sector. But retail investors have yet to be convinced despite the growing evidence.

Such is the turn-round occurring that even some of the open-ended funds which were suspended due to liquidity issues are considering reopening once more. New Star’s international property fund, now at new parent Hendersons, is aiming to lift its suspension by the end of the year. Having first announced that target in July, Mark Carpenter, head of Henderson New Star property business, said the goal remains intact and increasingly likely.

Carpenter says the property markets where the IPF is invested have not quite shown the same level of recovery as in the UK but there is positive news seeping through. He does not believe that regions such as central Europe and Asia Pacific have seen the end of their property valuation downturns but he feels the bulk of it is over.

The fund, which has about 50 per cent exposure to properties in Australia, Japan and Singapore, has been increasing its liquidity during this downturn and is eyeing new opportunities. In talking with existing and potential investors of the fund, Carpenter says he is noticing a definite improvement in sentiment towards property investing, particularly from funds of funds and discretionary managers.

Carpenter said he expects that IFP will reopen with “quite a liquidity buffer,” close to the typical 20 per cent found in bricks and mortar funds.

Standard Life Investments is positive on the opportunities for UK commercial property but also cautions that the European market has not recovered as much, with valuations and market prices between the two regions historically wide.

Standard Life managing director property investment Alex Watt says: “We see an inflection point for commercial property, where the tone is becoming more positive. In today’s environment of historically low returns on cash, the yield from property is drawing attention, with momentum building rapidly from cash-rich investors. The UK market is dominating investor interest while on the Continent we are moving towards prices that more fully reflect downside risks.”

Marcus Langlands Pearse, manager of the group’s UK property trust, echoes the sentiment with regards to improving investor sentiment. Although his UK fund remains on a bid basis, with more sellers than buyers, he says there has been increased inflows lately from institutional investors. Retail investors, however, remain wary and outflows are continuing from that corner of the market.

Langlands Pearse questions the timing of those outflows, noting that the UK commercial property market is steadily improving, with many buyers re-entering the market. While the UK fund is no longer a forced seller of holdings, Langlands Pearse says he would like to be more in a situation where the fund could start to make opportunistic purchases rather than be a mid-cycle buyer. Within the UK fund, property holdings are yielding around 8.5 per cent while the 15 per cent cash position is at best only achieving 2.5 per cent returns. Langlands Pearse says this is like giving away 650 basis points at the moment.

With regards to current opportunities, Langlands Pearse says there has been a significant bounce-back in retail warehouses, with yields up by 100 basis points, while prime is also coming back. Watt also favours prime locations. “We see the best resilience in large prime regional shopping centres in the UK and retail markets in Central Europe,” he says.

While both Langlands Pearse and Carpenter are positive on the changing tide of the UK commercial space, Premier pan-European property shares manager Alex Ross is even more bullish on the opportunities within his space. Solely looking at how property shares are faring in the current environment, Ross says the opportunities and deals he is seeing are some of the best in his career.

He too is sitting on a lot of cash in his portfolio but that is due to the type of his holdings, some of which include vulture funds looking to buy into the UK market. He has a third of his fund exposed to this area at the moment which has boosted his cash position, as these investors have yet to make purchases, to an effective 15-20 position and brought down the yield on his fund to 4.5 per cent.

“Once they start buying the assets, then the dividends will come. I don’t think now is the time to be chasing yield, it’s the time to be chasing total return,” he says.

Ross says he is investing with a number of best in class manage-ment teams which are raising capital via the quoted sector, some of which have not been active buyers since the last significant property downturn. Investors such as London & Stamford bought property after the 70s crash and again in the early 90s and are now looking at buying once more.

In projecting future growth opportunities from these investments, Ross says the 1990s property crash saw a fall of 27 per cent in values and then a 16 per cent rise the following year. This crash saw a drop of 44 per cent and as such he does not expect a two-thirds recovery as seen in the 1990s but does believe it bodes well for a significant uplift and expects there to be good gains in the next 12 months.

Ross says the UK is an opportunity trade in terms of distressed properties based on what has happened. That, combined with the devaluation in sterling, has made the UK market very attractive already for overseas buyers and so far this year 45 per cent of acquisitions have come from investors outside the UK.

Ross is also seeing opportunities in Reits. The rules enabling these listed vehicles were only finalised in some regions just months ahead of the commercial property downturn. As such, there are not many available, only 12 major vehicles, FTSE 250 and higher, in the UK and just one in Germany and Ross is currently holding all of these.

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