UK Commercial Property Returns

UK commercial property returns fall is moderating as market now seen to offer fair value IPD reported that in March its UK monthly commercial property index made a total return of -0.8% month on month, a slight improvement on the -1% in February and -1.6% in January, but year on year in March all property total returns hit a record low of -10.7%, down from -9.2% in February. Annual total returns in the retail and industrial sectors were the worst on record. However three month annualised income returns improved from their trough in the fourth quarter of 2007, and at 1.4% are at their highest since November 2005. Month on month returns have trended upwards since hitting -3.7% in December 2007, and capital values fell 1.3% in March compared to 1.5% in February and 2% in January.

Rental performance is a key indicator for investors, and many fear that there could be a downturn in rental income if the slowing economy hits the occupier market. This could lead to a "double-dip" investment yield curve, with initial, cyclical losses being overtaken by the drag from falling income returns. IPD reassured that rental income remained firm across all sectors in March, with an all-property income of 0.5% unchanged from the previous month. Malcolm Frodsham, research director at IPD stated: “The first quarter of 2008 has not proved to be a re-run of the sharp pricing correction on commercial property witnessed in the final quarter of 2007.

Capital values are still falling, but the rate has moderated month on month this year and rents continue to grow in all of the three main sectors.” “The results may not signal the bottom of the market just yet but at least investors have a better idea of where the floor is likely to be.” Analysts at Merrill Lynch said yesterday there should be a return to positive returns by 2010, assuming a constant 5.5% running yield. "The IPD forward curve is now implying capital value moves of -17.25% in 2008, -2.83% in 2009, then +0.8% in 2010. Interestingly, the growth anticipated in 2011 and 2012 is pretty marginal at +1.9%," the bank said. This comes as Threadneedle Property Investments (TPI) launches two leveraged direct property funds. In March it launched the Threadneedle UK Opportunities Fund for institutional investors which it will close at £60m. In July it will launch a second leveraged fund which will be several hundred of millions in size, with a minimum investment of £100,000.

This will be aimed at institutions and high net worth investors. TPI says it is possible to achieve arbitrage though this is not great yet. It also argues that there are encouraging signs in the market with the downside of values levelling out and selective reinvestment by investors that had withdrawn from the market. TPI director James Rigg explained that the company is a value investor and considers current conditions in the UK as an opportunity. These include the fact that property is much more high yielding, while income returns are appealing again with levels at fair value, if not good value. The UK, which was historically expensive compared to Europe, is now cheap. However Rigg added that deal levels in the UK are down by about 60% on last year, while TPI's retail direct investment fund launched last year has taken in £30m, well below its target of £100m by the end of 2008. Read more about Commercial Property.

Article Source: http://www.realestatepropertyarticles.com.

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