Investors who fled commercial property to escape sharp price falls and rising vacancy rates may be reticent to return any time soon – but signs are emerging that the worst may be over after two bruising years.
Commercial property prices peaked in June 2007 and have since dropped more than 40 per cent. If they fall again this month it will be exactly two years of consecutive monthly declines as measured by the Investment Property Databank (IPD).
However, in recent months, the price falls have eased. Capital values fell by record amounts each month in the final quarter of 2008 but recent declines have been much less severe.
Last month, average capital values fell by 1.6 per cent, according to IPD figures, while at the end of last year they were tumbling by almost 6 per cent a month.
Fund managers are gradually more confident that prices are now close to the bottom and some are starting to pick up opportunities where they can.
Chris Morrogh, director at Threadneedle Property Investments, says that, for the first time in 18 months, he is spending the cash that has built up in the fund.
“The market is so close to bottoming out and pricing is so appealing that we are now prepared to commit money,” he says. “We have bought properties for the first time in a long time.”
He believes quality retail units in regional town centres are offering particularly good value. While the retail sector has suffered, as big household names such as Woolworths have gone out of business, Morrogh says the yields are now enticing enough to come back in.
“We can’t be ignorant to the difficulties retailers are having but, if you go right to the heart of retail centres, the busiest pitches are generally robust,” he says. “And by normal standards they are very cheap.”
Shops in towns such as Brighton, Swindon and Bury are offering yields of 8.5-9 per cent, compared with around 5 per cent at the peak of the market.
Threadneedle has recently launched a new fund, which is available through Barclays Wealth. The fund, which is looking to exploit the opportunities across the sector, is aiming for a net distribution yield of about 10 per cent.
But not all property funds are able to take advantage of current value. Some – mostly those that were fully invested at the peak of the market – have had to sell holdings quickly to meet investor redemptions and are now short of cash.
A number of funds including New Star’s International Property fund and one of Aviva’s four UK property funds, are still closed and may have a waiting list of investors looking to withdraw their funds.
Mark Dampier at Hargreaves Lansdown says that while there are some good opportunities for fund managers, retail investors should bide their time.
“There is no rush to buy in yet,” he says. “I think commercial property will be a story – and is an area to keep an eye on – but I would recommend waiting until it looks like values are coming back up.”
He points out that while the yields on property are looking attractive, the funds may only be 50 per cent invested.
“Half the portfolio may be achieving a yield of 7 per cent or more, which is great, but the other half may be getting nothing like that,” he adds.
Chris Laxton, managing director of real estate business development at Aviva Investors, says inquiries from investors have started to pick up but there has not been a material improvement in cash inflows.
