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Commercial property revival could be ‘wrong sort of recovery’

HSBC Global Asset Management’s head of multi-manager Guy Morrell is warning that the recent recovery in commercial property may be unsustainable.

He says an improvement in sentiment – with investors tempted by a record gap between cash and property yields – could be driving up prices to a level that fails to reflect weak occupier markets.

Commercial property values fell by 44.2 per cent between June 2007 and July 2009, according to the IPD UK monthly index, and the market is now starting to see increases in capital values.

Property fund sales totalled £261m in September, double the intake in August.

Morrell says it could be the “wrong sort of recovery” and points to the fact that rental values fell by 8.6 per cent in the 12 months to September 2009.

He says: “One scenario is that capital values stabilise and the market delivers modest, single-digit total returns dominated by income. Such an outcome, though considered unexciting by some, would be sustainable.”

“A possible danger is that increased demand for investment property drives prices up too quickly and renders the market unattractively priced once again.

“If so, it will be the wrong sort of recovery in the sense that it will be unsustainable and would leave the market vulnerable for a further decline.”


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