Warning over commercial property 'recovery'

1 December 2009

Signs of improvement within the commercial property sector have encouraged investors, but experts warn that any recovery could be short-lived.


Last month, Aviva lifted restrictions on its unit-linked UK property fund, and in October Standard Life unlocked its property funds. This represents a boost in confidence regarding commercial property’s future growth potential.

Towards the end of 2007 many investment houses introduced restrictions on their property funds, following a terrible 
18-month period for commercial property. Aviva introduced its restrictions in January 2009. After the double-digit returns of 2004, 2005 and 2006, the market had peaked in June 2007, and the next two years showed dramatic dips of 3.1% and 22.3% respectively.

This downturn provoked a mass exodus of investors, with redemptions from property funds reaching £58 million in December 2007, compared with monthly averages of £25 million in the previous three months.

The restrictions were introduced because companies feared they would run out of cash reserves and wanted to protect the interests of remaining investors. Now restrictions have been lifted, investors are faced with the dilemma of whether to stay or leave.

Although the UK commercial property market rose by over 60% between February and October this year, the bumpy ride may not be over.

Guy Morrell, head of HSBC Multimanager, says: “For an illiquid asset class like direct property, it’s particularly important to understand the drivers of performance.”

He believes it’s not rental values but increased investor demand that has boosted capital value, so any improvement in performance could be short-lived.

Mark Dampier, head of research at Hargreaves Lansdown, partly agrees. 
“I wouldn’t want people to get carried away. The realistic yields have already fallen to about 6.5% to 7%, but against interest rates, 
it still doesn’t look bad. I’m not saying put 25% of your portfolio in, but dip a toe in 
the water – maybe 2.5%,” he says.

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