Commercial insurance article archive
Commercial property sector moves into the unknown
The commercial property sector has enjoyed substantial growth in recent years with investors experiencing good returns but recent figures show the credit crunch has sparked a worrying slowdown in the industry.
According to the Investment Property Databank, the UK's commercial property market lost on average 7.7 per cent of its value last year, while the Guardian reports that several big investors including Axa, Friends Provident, Scottish Equitable and Scottish Widows have refused withdrawal requests from hundreds of small investors.
The Investment Property Forum's (IPF's) consensus has predicted a negative total return – a fall of 2.6 per cent during 2008 - for property for the first time it since it started in 1999, the Financial Times Reports.
The survey, which analyses the views of fund managers, agents and brokers, also predicts that capital values will fall by 7.8 per cent this year, while rental growth will fall to 1.1 per cent, from a forecast of 2.4 per cent last quarter.
Rob Martin, head of property research at Legal & General investment management, told the Guardian: "After 14 years of positive returns, the UK commercial property market went into sharp reverse in the second half of 2007."
As the cost of borrowing has increased in the aftermath of the credit crunch, the availability of funds to commercial property investors has been reduced, making buyers more susceptible to risks, he added.
According to Mr Martin capital values of commercial buildings still have another five to ten per cent to fall but their future is tied to the financial sector and the economy as much depends on the amount banks are willing to lend investors.
"We are in are in amber territory but it is too early to say what the impact will be of Bear Stearns. The credit crunch underlines the downside risks. If the banks don't refinance loans there could be substantial further losses," he continued.
The reversal of fortunes in the sector has had a severe impact on some property investment firms.
The Times reports that Mapeley took a £148.6 million writedown on the value of its holdings in March and signaled that takeover talks with its majority shareholder, Fortress, may crumble.
According to the newspaper, Fortress is believed to have offered just £19 per share for the property investment and outsourcing company signaling a sharp reduction in its value - a year ago the company's shares were trading at £40.
Meanwhile, property investment group Assetz has raised a fund to help builders struggling to raise debt finance by bridging the gap between the fixed level of equity required by developers and depleting levels of finance from banks.
However, those who make use of Assetz's fund will have to pay the company between 50 and 65 per cent of the profit from the development, in addition to 15 per cent annual interest on the initial loan.
Despite this, Stuart Law, chief executive of Assetz, has claimed: "This is not greedy. I've not had a developer bat an eyelid yet."
Nevertheless, the commercial property sector is not completely shrouded in gloom.
A study by Property for Life recently revealed that 71.3 per cent of property investors are seeking to increase the size of their porfolios - ten per cent more than at the end of 2007.
"Demand for rental accommodation is still driving the market, pushing rents up and a record 65 per cent of investors say they are no longer feeling the pinch of higher interest rates," commented David Austin, managing director for the company.
West London industrial property developer Brixton reported a 0.7 per cent increase in the value of its holdings last month, calculating them to be worth £2.45 billion, the Times reports.
"These results continue to differentiate Brixton's business form the general commercial property mark," said Tim Wheeler, the company's chief executive.
But he conceded: "We are not immune from wider influences and the ongoing uncertainties in the global credit markets. The effect of this on the economies of the UK, the US and the Eurozone in particular is likely to have a dampening effect on the activities of the UK corporate sector."
Mr Martin informed the Guardian that commercial property yields have already begun to increase and are now back above government bond yields at around 5.5 per cent, a factor that is likely to encourage shrewd buyers to re-enter the market later in the year.
Long-term commercial property remains a good investment because rents tend to rise in relation to the economy and had upward-only rent reviews, creating steadily rising income along with potential capital growth, he concluded.
07 Apr 2008