Investors expect to increase their allocation to UK commercial property as values rise

Written by Ray Clancy

Tuesday, 09 March 2010 09:27

More than nine in 10 real estate investors plan to either maintain or increase allocation to UK commercial property in 2010 as they expect values to stabilise or rise over the year, according to a new survey.
Some 45% plan to increase their investment in the sector according to the survey of fund managers, wealth managers, and private investors by Investec Private Bank.

Although a significant 79% see default levels in UK commercial property rising in 2010, 54% still believe valuations will stabilise this year and 23% forecast values will increase.

‘This reflects our view that despite the prospect of rising defaults, market conditions are likely to remain stable over 2010 and UK commercial property is looking increasingly attractive to many investors,’ said Paul Stevens, head of Investec’s Structured Property Finance division.

‘As a result we are likely to see yields narrowing slightly over the coming months,’ Stevens said, adding that he expects to see more opportunities to lend to new and existing clients as well as higher demand for loans to development projects.

The recovery is seen as confined to prime properties, with the majority of survey respondents predicting prime yields will drop 0.5% over the next 18 months, while yields on secondary sites will rise slightly to 9%.

In terms of sectors, the Investec study showed most property investors expect industrial properties to perform most strongly over the year followed by retail, office and leisure.

The survey comes as new data from consultants CB Richard Ellis shows that UK commercial property values rose 1.4% in February, as prices sustained their recovery for the seventh month in a row, while average yields fell 0.1% to 7.2%.

Rental values for offices, retail and industrial properties fell 0.2% on average across the country as tenants continue to cut costs amid the weak economy, the report says.

Offices in Central London showed flat rental growth in February, however, a sign of firming occupier demand, and were also the month’s best performers with total returns at 2.6% and capital growth of 2.1%, the report adds.

Average total returns, comprising rental income and capital growth, rose to 2% in February, compared with 1.5% in January, while All Property equivalent yields fell 0.1% over the month to 7.2%.

‘The general sentiment in the market currently is that property is approaching fair value, with ongoing yield compression expected in the short term,’ said Nick Parker, economics and forecasting analyst at CBRE.

He said some UK secondary markets are slowly starting to attract interest at the start of 2010, with investors looking further up the risk curve in a hunt for better returns.

‘It is widely expected that the yield gap between prime and secondary property will slowly narrow over 2010 as competition for good secondary assets becomes more heated,’ Parker added.