UK Commercial Property Yields Fall as Investor Landscape Resets
The UK commercial property market is in for a bumpy ride for the next six months, according to the latest research from Invista Real Estate. Despite the capital values stabilizing over the next six months, rental values are expected to continue declining for another year or two, with a rapidly evolving investor base. And, just as the US is bracing for a wave of CMBS deliqunecies based on the expected poor performance of collateral, the UK market seems to be positioned similarly. However, as the Invista report states, the investor and buyer landscape of the commercial real estate market is changing, expanding its scope and personnel to remain open to opportunities. Players in the market can now expect buyers to look outside the traditional prime, well-located, longer-term rent properties. These types of properties benefited the flight-to-quality mentality of 2009, which significantly drove down yields across the less prime market. It is the latter market, however, that is getting all of the recent attention. There is little doubt that the investor landscape is shifting. Large investment banks located in the financial centers of the City of London and nearby Canary Wharf are actively seeking out new types of investors, according to HousingWire's sources there. An upcoming report on the European commercial property market from CB Richard Ellis gives a numerical picture of the market. Q109 to Q309, saw €41bn ($51.48bn) of investment activity, a steady increase in each quarter starting with the €12bn in Q109. The company expects the trend to continue, with Q4 seeing the highest level of activity for the year for a total of €60bn for the year. “The recent upturn in investment activity suggests that many investors believe the European market is approaching the bottom of the cycle; and in some cases, it may well be past that point," commented Michael Haddock, the director of EMEA (Europe, Middle East, Africa) capital markets research, CB Richard Ellis. "Whilst investment turnover has started to pick-up from lows of around €12bn in both Q1 and Q2 this year, concerns remain about slow economic recovery and its lagging impact on the occupier market.” Capital values rose 1.5% in total over Q309 – a return to positive growth after eight consecutive quarters of falling values according to the UK Quarterly Property Index. For Invista, the shift in investor sentiment occurred between June and the beginning of December 2009 as the implied total returns for the calendar year from the derivatives markets moved from -15% to 2%, citing the Tradition Property, Property Derivative Price Report. Further, share prices on the FTSE EPRA/NAREIT real estate index rose by 29% over the same period according to info from Thomson Datastream, released last month. "To date, the current recovery in values appears to reflect a return towards fair value after a period of excessive risk aversion," said Mark Long, head of investment strategy and research at Invista. "However, over the short term there is a risk that the current recovery in values runs ahead of the underlying asset class fundamentals, which may result in values dropping back as the impact of the weak occupier market reasserts itself or interest rates increase.” Write to Jacob Gaffney.