A Long Hard Look in the Mirror for the UK Commercial Property Market

Posted on 13 September, 2011 by MOVEHUT

When dealing with people it’s often difficult to talk frankly, to tell them what you think of them, for fear of hurting feelings or crushing relationships.For the UK commercial property market, this is not a problem. It is the subject of objective analysis, regular research and extensive insight from agencies such as Cushman and Wakefield, who have no problem telling it as it really is. Their latest offering is Marketbeat, a report into UK commercial property market trends and price movement. The UK commercial property market is told straight that it is ‘clearly polarised between London and the rest of the UK’.

Investment activity for prime commercial property remains ‘intense’ despite an unforeseen reduction in activity over the Easter/Bank Holiday period. Secondary commercial property markets ‘experienced somewhat of a revival’, attributed to ‘the relative dearth of supply in the prime [commercial property] market’. Second-tier or short-income offices, warehouse parks and industrial units are found to be in demand, ‘although this has been largely confined to London and the South East’.

Out-of-town offices top the prime commercial property headline investment league table for yields to June 2011 with 8.25%. Large distribution centres and Thames Valley offices tie for second on 6.25%. Retail parks (5.85%) and shopping centres (5.50%) are mid-table with West End offices (4%) occupying the final place. The average across the twelve commercial property sectors is 5.7%; this is described as ‘stable’ and means ‘the UK is increasingly being perceived as a safe haven’ for commercial property investment by international investors.

Weaknesses in the regional offices market are offset by a strong performance from the West End commercial property, where take up is approaching ‘peak levels’. The City and Docklands commercial property markets are labelled ‘subdued’ but we should keep an eye on the next few years, when a flurry of lease expiries will coincide with the completion of several major commercial property schemes. A trend has been observed in secondary commercial property market demand, which ‘continues to come from entrepreneurial UK investors and opportunity funds, who are pursuing more selective [commercial property] acquisition strategies’.

The retail sector has benefitted from some stabilisation, says the report, which points out that demand appears to be concentrated inLondon’s prime commercial property market. The lack of supply of commercial property in these areas, which include Regent St, Oxford St and Bond St, is probably the reason record prices were reported there. Other key regional commercial property markets have seen ‘positive signs emerging’. Increased supply of commercial property is in evidence, although the majority is secondary ‘with very little prime [commercial property] stock to satisfy outstanding requirements’. Westfield Stratford, London, is singled out as an example of a well-located prime commercial property site.

The industrial sector is also singled out, albeit as ‘the weakest performer’. This is put down to a lack of quality commercial property assets, particularly in the South East, where much of the stock has come from commercial property portfolios released by banks. The continued growth in internet retailing means that supermarkets and retailers have a ‘steady’ demand for industrial commercial property – mainly in the 10,000–50,000 sq ft region. Speculative development remains ‘sporadic’ and industrial commercial property rents remain ‘static’.

For those seeking finance in the commercial property market, lending conditions ‘have improved and new sources of debt have emerged recently’. However, this comes with the caveat that ‘the supply of new credit is still slow to materialise’. Banks reportedly ‘remain cautious’. This is only partly balanced out by other lenders who are showing ‘increased willingness’ but primarily ‘for [commercial property] assets in premium locations, backed by strong covenants and experienced management teams with good track records’.

The question of interest rates is also tackled in the report. The ‘huge volatility in market expectations of when they will occur’ is combined with the observation that pension funds are increasingly putting cash into commercial property. A nod to the ‘heady days’ of pre -credit crunch 2007 concludes that the many deals completed up to this period will need ‘further debt restructuring and liquidations of the underlying properties’.

All commercial property total returns are said to have ‘continued to steadily flatten out last quarter, ending the period at 9.1% for the year’, a statistic which becomes the coda for a year of ‘steadily slowing performance’ in the commercial property sector since the high of July 2010.


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