A report by London-based Cordea Savills suggests the UK commercial property market will bottom out and begin to recover later this year.
The firm predicts that by the end of 2009 UK capital values will have fallen around 50 per cent from their 2007 peak, yet argues that this short-term distress is creating a “window of opportunity” for investors to purchase high-quality commercial property, with secure income, at attractive prices.
For investors with Euros or US dollars, entering the market during this decline could offer even greater opportunities.
The firm warns, however, of a two-tier market for commercial property. This is reflected by an increasing demand for prime property and continued malaise in the secondary market.
Prime assets with very long dated income let to high quality tenants have been recognised for being “well priced”, and for providing low risk income. Investors have started once again to refer to the “bond-like characteristics” of such property investments. This contrasts starkly with properties let on shorter leases – those which may have to be re-let over the next 2-3 years – with weaker covenants or development opportunities, which have yet to really see any purchaser-led demand return.
The report also states that the risk premium between property and other asset classes is now so wide that there will be an “inevitable movement” of investor money from bond assets to their property equivalent.
The report rejects the argument that the UK economy is set to experience a protracted period of turmoil, akin to Japan’s ‘lost decade’ and suggests that the timely introduction of substantial fiscal stimulus packages early in the crisis will be reflected in a swifter economic recovery than other European markets, which have been slower and less decisive in their response.
George Tindley, director of investment at the firm, said the UK accounted for around 29 percent of Europe’s market.
“There has been a noticeable change in sentiment towards property in recent weeks which has been caused by a number of factors, not least diminishing fears of systemic risk to the UK economy, the prospect of a return to GDP growth in early 2010, improved debt availability, and value having been arrived at for the prime end of the market,” he said.
He added: “This is a golden opportunity for investors to exploit the power of their equity by cherry-picking assets demonstrating strong covenants, established locations and long lease length at a discount to historic market levels.”