Commercial Insurance Articles
Commercial property outlook 2008
13 Dec 2007
Global commercial real estate faces a difficult year ahead as the fallout from the credit crunch continues to sink into property credit markets - though many analysts speculate that higher risks could translate into big gains for some hawks.
Investors are increasingly balking at opportunities to buy bonds backed by commercial mortgages, mindful of the unsuspecting woes that crept up to the US housing market following the recent sub-prime crash.
As hundreds of thousands of bad credit US homeowners began defaulting on their mortgages this summer, the realisation dawned on investors around the world that their portfolios could include repackaged debt from the collapsed mortgage market.
Uncertainty over the reach of irresponsible lending practices in the sub-prime sector ultimately led to a collapse of confidence in commercial property, with the price for corporate mortgage-backed securities gradually slipping as buyers increasingly raised doubts over the tenability of such bonds.
Alluding to a 1.9 per cent fall in the prices of shops, offices and industrial property, William Mack, founder and senior partner of Apollo Real Estate Advisors, told Reuters that capital markets were effectively "frozen".
But the combination of a dwindling supply of credit and falling real estate securities prices ultimately means that - for savvy investors with large reserves of cash, at least - the opportunity exists to take advantage of the pain of others.
Leading global asset management company Schroders last week weighed in on the subject by making its own prediction of when it expected the commercial UK property market to "bottom out".
In a statement issued to investors, the UK fund manager announced a dramatic £2 billion cut to the value of its Schroder Exempt Property Unit Trust - marking a 12.5 per cent reduction on September's valuation and denoting what the firm equated to the trough of the current downturn.
Mark Callender, head of property research at Schroders, said that the investors should interpret the dramatic price cut as "a sign of how far we see the whole market falling before bottoming-out" and he predicted a flurry of resurgent buying activity in the new year.
While other valuers are expected to move more cautiously in reducing the price of their property portfolios, Schroders seems convinced that acting quickly will serve as reassurance to its investors that there is light at the end of the tunnel. The firm has repeatedly emphasised the overall buoyancy of the market given strong demand from occupiers across the retail, industrial and regional office property markets - singling out the M4 corridor as looking particularly auspicious.
Not everyone is convinced by Schroders' attempt to pre-emptively steady the boat, however. Many analysts point to the significantly-dented investor confidence that has arisen from widespread collapses of multibillion-pound property deals between August and October, not to mention the dramatic downward valuations of major players like British Land, Mapeley and now of course Schroders.
October's 1.9 per cent decline in capital values comes on the heels of a 1.6 per cent fall in September and effectively amounts to the sharpest drop since the property recession of 1990, painting a gloomy picture of Britain's £700 billion commercial property market.
And the City office market also looks particularly weak with concerns over excess supply continuing to gather pace. Here, the widespread impact of the global credit crunch is once again on display as major banks and financial institutions find themselves forced to downscale their loan books, necessitating
cutbacks across the board including in the expansion of their commercial property capital.
"We are increasingly vulnerable to alarm and despondency" was the ultimately forlorn assessment that Chris Turner, head of property at Thames River, gave investors.
In his latest report to shareholders, Mr Turner admitted that looming cuts to the value of the fund's assets could have a devastating cyclical impact on share prices. He warned that having already dipped on news of predicted capital value depreciations, stock prices could continue to tumble as constantly-updated Net
Asset Value figures paint an ever-bleaker picture of the market.
The fund's share value fell almost 20 per cent between April and October to its current level of 234p. Reflecting as this does the wider correction to capital asset values, such share price depreciations inevitably come hand-in-hand with lower yields. Crucially, however, while speculation-driven share prices look likely to fall further, yields have actually begun recovering from their June
low of 4.5 per cent.
And while the current 5.25 to 5.5 per cent average yields cited by the Investment Property Databank will do little to excite investors, they nonetheless serve as a reminder that profitability in commercial property remains buoyant - with falling demand for such securities merely reflecting concerns over the wider instability of the financial markets (that would be the credit crunch, again), and not any inherent doubts over the integrity of the sector.
So while doubts abound over Schroders' allegedly optimistic prediction of market stabilisation, it appears that the majority of investors see an altogether robust, if somewhat tumultuous, market in 2008.
"Ultimately, our central view is that long-term investor demand for commercial property remains healthy," research consultancy Capital Economics posited. "Nevertheless, once we emerge from the current malaise, more fluid investment markets mean that yields and capital values are likely to show much more short-term volatility than in the past."
