Commercial Property Interest Fading

The latest data released by the Investment Property Databank (IPD) suggests that the growth once seen in values within the commercial property market in the UK has begun to tail off...

The latest data released by the Investment Property Databank (IPD) suggests that the growth once seen in values within the commercial property market in the UK has begun to tail off.

Last year, commercial property funds enjoyed a resurgence in popularity in the country and, over the course of 2009, proved themselves to be the best-selling funds available. However, with IPD recording just a 0.8 per cent rise in values during April, many investors are now unsure whether it is the best time for them to buy.

Investors who choose to buy commercial real estate funds will either be placing their money into office blocks and shopping centres or a combination of property and shares in property companies.

One of the biggest draws of the form of investment is that it is able to offer individuals a return on two counts: capital growth from the increase in value of the properties and income from the rental yield.

However, Malcolm Hunt, head of UK Client Services at IPD, explained that currently there was a chance that the commercial market could suffer, especially if the downward revision of UK economic growth forecast this week by the Office for Budget Responsibility proved to be accurate.

"Historically, property markets suffer when economies falter; affecting occupier markets and rental growth which, in turn, influence property values," he said.

This view is further enhanced by the most recent monthly index from CB Richard Ellis, which also showed a tailing off in prices, to 0.6 per cent in June.

"The property investment market is clearly slowing, with investors turning more cautious and yields flattening," Nick Parker, an analyst for the real estate agent, said. "Outside central London, occupier markets remain fragile."

London Leads the Way

Indeed, it is the central London commercial property market which appears to be preparing itself for the largest upturn in interest, and values, in the coming years.

A lack of new developments and rising demand from businesses is likely to cause rental yields and prices to be forced up in the capital.

Meanwhile, according to an article by the Guardian, office markets in some other areas of the UK are also beginning to show the first signs of recovery - although not at the same pace as London.

Speaking to the news provider, Liz Peace, chief executive of the British Property Federation, said that in order for the recovery to occur on a more rapid and countrywide scale, speculative development from office builders would be key.

However, the property expert bemoaned current tax laws which she claimed were hampering this from happening.

"Labour's empty rates tax is choking off any hope of new speculative development," she explained. "They [the government] should look to waive empty rates on newly-built space at the very least - a signal of support for business that wouldn't cost them a penny."

Overall, the current state of the UK commercial sector would suggest that it is not something which should be bought into by those looking to realise short-term gains, but instead favoured by individuals who are willing to take a long-term outlook to their investments.

International Commercial Property

But is this slowdown in commercial property investment something which is unique to the UK?

Certainly, a number of markets around the globe experienced a downturn in activity due to the economic crisis, and a number of different property value indices offer different outlooks for the sector.

One such view concerns the commercial property market in the US suggesting that it is showing signs of reaching the bottom and as such could offer potential investors with an opportunity to buy into what could be a burgeoning sector.

Speaking to Time magazine, Mike Kirby, chairman of Green Street Advisors - a Real Estate Investment Trust research firm - said that foreign investment is helping it to recover.

He highlighted the fact that the market was currently near its bottom and as such could favour longer-term investors looking for a decent return on investment.

"Eventually, what has gone down comes back up. So we're sitting at a historically low occupancy and rental rates, but barring a double dip, there's only one way to go," Mr Kirby confirmed.

Meanwhile, the sector in China, which is often singled out for its strong residential market, also boosts the opportunity to make returns from its commercial side, it has been claimed.

Richard David, from the Shanghai-based Treasury China Trust, explained to Asian Investor that a lack of government intervention in the commercial market was good news for potential buyers, with both retail and office rents continue to climb in the country.

With economies and businesses around the world emerging from the recession, as well as global housing markets beginning to strengthen, it appears that demand will continue to be strong for office and retail-based investments - although a cautious approach is needed within recovering markets.ADNFCR-3415-ID-19887711-ADNFCR

- Thursday 15 July 2010

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