Asset managers predicting tough two years ahead for UK commercial property market

Monday, 14 December 2009 11:35

Asset management firm Schroders expects 2010 to be a volatile year for UK commercial property, with economic uncertainty and debt issues buffeting a market that is only just coming out of a two year downturn.

Commercial property values saw their first monthly rise in nearly four years in October after falling 44% from their peak in the middle of 2007 but the market could still be hit by further tenant failures in a weak economy, Schroders said.

‘The market will be more volatile. We may have avoided a double dip recession next year, but our economics team is not ruling out a long period of slow growth,’ said Mark Callender, Schroders’ head of property research.

A rising chorus of investors are warning of a short lived recovery for the UK’s commercial property market, Europe’s second-largest after Germany, if values rise too quickly without growth in the economy and rents.
There is also the threat of distressed property sales from banks which over gorged on UK commercial mortgages during the boom years. Callender said there could be £30 billion of those loans under water.

‘It has become a more distant threat but it’s not one that we should ignore when at the same time we’re seeing the income from portfolios start to fall, which should impact the ability to pay interests,’ he explained.

Schroders, which manages £7.5 billion in property related funds, forecasts UK commercial property total returns, including rental income and capital value growth, will be 2% in 2009, rising to 18% in 2010. But it expects total returns to fall back to -2% in 2011 as an over optimistic investment market drives up prices for some properties triggering a correction in values.

Schroders, which is aiming to raise up to £400 million by the middle of 2010 for a UK property opportunity fund, expects to invest selectively and may seek to form joint ventures with banks, its head of property William Hill said.

‘At the moment we find long lease properties over priced and will concentrate on assets we can do something to, whether to improve planning consent or re-position assets banks need to sell,’ he added.
Other property investors including London & Stamford and Legal & General have also indicated plans in recent months to work with lenders such as Lloyds and Royal Bank of Scotland Group to detox their troubled property loan books.

‘At the moment banks are very reluctant to sell their distressed assets to buyers looking for 20%. As time go by, I think there will be more opportunities to partner the banks as opposed to buying distressed assets,’ Hill said.