Fears grow of commercial property price fall
The number of financial advisers expecting commercial property prices to fall has increased significantly since the start of 2010.
Research carried out in July 2010 on behalf of Reita, the education and awareness campaign for quoted property and REITs, shows that 24% of 269 independent financial advisers (IFAs) surveyed believe that prices will fall, compared with only 6% in January 2010. Belief that commercial property prices would rise also faltered, with 73% of IFAs predicting rises in January and only 49% feeling the same in July.
Despite their uncertainly over property values, almost half of the IFAs questioned in July said that investors should be interested in REITs and funds that invest in REITs, with just over a third thinking they shouldn't. However, only one third of advisers questioned feel confident in giving advice on the risks and opportunities of the different commercial property sub-sectors.
Reita chairman Patrick Sumner commented: "The growing concerns among advisers reflect justifiable uncertainty about the economy over the next year or two, mainly in the light of public sector cuts. Recent news of falling house prices exacerbates these concerns, but there are big regional and sectoral differences. The preponderance among the leading UK REITs of Central London and high quality retail property sets them somewhat apart, as do their relatively strong balance sheets and access to financial markets. We are in the early stages of a slow economic and commercial property market recovery, in the course of which there will be the odd lurch, but shares, in my view, are trading at the cheaper end of fair value, and dividends are sustainable."
This cautious view is not held by all. Director and head of valuation and advisory services at Colliers International, Russell Francis, is much more upbeat about prospects for property price growth and the returns available. He said: "Prime and good secondary property, having seen capital values fall by about 45% between the summer of 2007 and the summer of the 2009, have recovered very strongly over the last 12 months with a bounce back of about 20%. This rise in value has been driven by a hardening of yields and, while the expectation is that the scope for further yield hardening in the next six to 12 months is limited, Colliers International is still forecasting that good quality property will provide a 10% total return in 2010 and a 10.4% total return in the five year period to the end of 2014.
"While economic growth remains subdued, occupier demand will remain modest, resulting in rental growth not returning until 2012. Despite this, many properties still offer excellent returns given the very low level of interest rates and the defensive nature of many property investments. Central London is however, seeing good rental growth across most sectors and is set to perform very strongly over the next few years.
"The market is currently pausing for breath after a mini bull run, but in our view the amount of funds available to invest in UK property means that there is unlikely to be any significant reverse in capital values for prime and good secondary properties, with, in all probability some yield hardening in 2011 as confidence returns to the economy."
However, as Peter Cosmetatos, Reita's programme director, points out, there is cause for both optimism and caution in different parts of the market:
"The commercial property market remains quite polarised, with prime property having recovered strongly over the last 12 months but secondary and tertiary property generally remaining very weak, with low transaction volumes - so it isn't surprising to see a range of expectations about what values will do. While respondents are right to recognise that advising on property investment is a specialised area in which most lack strong expertise, their views of the market seem to be broadly consistent with the views of Reita's expert panel last month. The view in favour of investment in REITs makes sense, for example, because the UK's REITs tend to be focused on the better quality end of the property market, where prices now seem to be stabilising."