The gap between the best and the rest in the commercial property sector is widening, according to research from Legal & General. Although the industry looks set to enjoy greater returns in 2013, there is considerable polarisation between the performances of assets in the medium term. This means those considering real estate investment must choose the most lucrative industry, secure the best locations and opt for high-quality stock to receive strong returns. Within individual markets, there is also a considerable divide between prime and secondary units, which will leave buyers clamouring for the best stock.
Director of research at Legal and General, Rob Martin, explained: "A number of subsectors which have been shunned by the risk adverse environment are now priced to deliver above-average returns. We favour the higher-yielding sections of the office and industrial markets, primarily outside of London. To ensure that assets can deliver, the focus is on those which by virtue of their specification, their local market and microlocation can find tenants through the cycle and do not depend on a robust economic recovery."
Within individual property segments in London, it is those units near transport infrastructure and hotspots that are performing the best. While city-wide regeneration projects are helping to more evenly distribute real estate activity in the capital, traditional locations such as the City, Kensington and Chelsea are still in demand.
Nevertheless, the UK commercial property market is a good place to be in 2013, with an easing in the credit market and persuasive valuations making real estate prices broadly stable, after the three percent fall in 2012. Legal and General predict total returns to be dominated by income return, which currently stands at six per cent. Greater lending is likely to inspire occupier confidence, but Mr Martin warns that most transactions will involve businesses moving from "substandard, poorly-located buildings", opposed to companies expanding into new areas. The research director also stressed the importance of not over-playing improvements in the market, as "appetite from new lenders remains very selective".
- Tuesday 12 February 2013