The outlook for UK commercial property returns is expected to be positive, even though economic growth in the country is “likely to be slow,” according to Property Wire. Prices are expected to remain stable throughout 2013 which is an improvement over last year, when the market fell by approximately three per cent.
Legal & General Property lists three factors that are expected to drive commercial property returns this year. The first is the effort of banks to stimulate growth. This component has been included in the company’s forecasts for improved economic growth.
The gradual improvement should encourage occupier confidence in upgrading to modern buildings, according to Rob Martin, the firm’s head of research. He explained that the majority of lettings would likely be moves from substandard, poorly located buildings, as opposed to “outright expansion” by business owners.
Mr. Martin also pointed out that easing in commercial real estate credit markets will also have a positive affect the property market this year. Recently, UK banks have been more willing to offer loans on commercial properties. He warns that these positive indications should not be overplayed, though.
The third factor indicated by Martin is the valuation case. He explains that the risk premium offered by commercial property remains relatively attractive compared to historic averages.
Legal and General Property predicts that the provincial retail sector will continue to perform below par in 2013. A number of key factors will contribute to this poor performance, including pressure on retailers from online stores, the general weakness of consumer spending and the rise in the number of supermarkets selling non-food items. Martin also observed that rents need to be priced at a level that would allow retail store owners to trade at a profit.
The London retail market, on the other hand, will continue to perform well, and will benefit from the growth in international tourism. The strength of the capital’s retail market is a “sustainable long-term trend,” according to Martin.
Philip Nell, a manager with Aviva Investors Property Trust, is also predicting a positive outlook for the UK commercial property market. The overseas management group has doubled its return forecast from 4 per cent to 8 per cent and claims that the combination of increased risk appetite and cheap valuations will result in higher demand.
Investor interest in commercial property will extend beyond the Central London market, according to Nell. He indicated that he expected “good secondary assets” in outlying areas would perform well for the next couple of years, “even on a risk-adjusted basis.”
Nell advises investors to be mindful of the risks of property investment and to manage their assets appropriately. The most successful strategy at this point is one that focuses on specific assets, as opposed to a top-down sector based strategy he believes.
