A precarious path between boom and bust predicted for UK commercial property market in 2010

Cautious real estate investors should resist the temptation to join a stampede for UK commercial property in 2010 as the market treads a precarious path between a new boom or a second bust.

Fears of freefalling commercial real estate values have been replaced by worries of a pricing bubble in the UK after yield chasing buyers triggered a 2.7% rise in prices in November, the highest monthly gain in nine years.

Data from CB Richard Ellis showed that average UK commercial property yields were 7.6% in November, more than double the yield on 10 year UK Gilts.

Cash rich property funds face increasing pressure to outbid wealthy sovereign buyers and global pension funds for a limited pool of desirable real estate stock, creating an investment market that is worryingly out of synch with falling rents and tenant demand, property analysts have said.

‘I think some people have gone into UK real estate not quite understanding the risk that they may not see a real capital gain for some time,’ warned Jonathan Thompson, global head of real estate at KPMG.
‘Ten years down the line, those putting money in now might be very happy they did so but two years over the horizon, we might find ourselves in a position not wholly unlike the one we're in now,’ he explained.

‘The market is so painfully thin and I'm somewhat concerned that the money flowing into some open-ended funds forces a behaviour that is not investment driven.
Some managers have to buy property irrespective of whether they see value because they can't hit target returns if they are laden down with cash,’ he added.

Even though some lenders are confident their UK real estate bad debts have already peaked, Thompson said they still had much work left to repair their balance sheets. ‘On the face of it, it looks like real estate is the market to be in but you can't forget the vast raft of loans and CMBS secured against real estate that remains to be worked through. Nowhere near enough degearing has taken place,’ he said.
While Thompson urged buyers to be vigilant for evidence of overheating in some pockets of Britain's property market, he was less concerned about apparent bubbles in Chinese real estate markets.
‘When you look at China through western eyes, you're guaranteed to get it wrong. We had a credit fuelled boom, and people argue that China is enjoying the same. But the big difference is the Chinese government runs China as a corporation. And it can turn the taps off fast,’ Thompson continued.

And he is ‘quietly quite bullish’ about the US property market, where he saw an energy among real estate investors to embrace new pricing. ‘It is the only country in the world where residential prices look to have moved to a level actually below the long term affordability index. The banks are showing more drive to clean out their problems and the Dollar is weak so it will attract overseas investment. When else have you had a better chance of getting your hands on a slice of Manhattan?’ he concluded.