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Nerve and a long term outlook needed for commercial property investment

High quality safe haven assets will continue to be in high demand, especially those which can provide a positive yield, according to the latest report from Deloitte.

‘Whilst making constructive predictions in the current market is not easy, the huge uncertainty and overbearing gloominess makes it all too easy to predict the end of the world as we know it. However, the one thing that the past tells us is that while things may be difficult early this year these times do pass and more often than not create significant opportunities,’ said Claire Faulkner, head of Deloitte real estate.

‘We cannot, however, ignore the current climate. Commercial property values are likely to fall during 2012 as secondary property is hit again by risk aversion and tenant default. Retail in particular is due to suffer with the March quarter date a likely trigger point for further retail failures,’ she explained.

‘Both lenders and borrowers will see little respite in 2012 with the year likely to see more banks withdrawing from the UK market and others reducing their balance sheets more aggressively than seen so far this cycle,’ she added.

Away from the short term market dynamics there are other threats to owners and managers of property, the report points out. The increasing legislation heading towards property fund managers is likely to add costs at a time when fees are already under pressure and equity raising is difficult.
It also says that the green agenda is becoming increasingly visible with significant implications for those not fully considering the planned energy performance standards. The acceleration of building obsolescence will be a key issue.

London offices will be more robust than many expect, according to Anthony Duggan, head of real estate research at Deloitte. ‘The negative sentiment towards the office sector, and in particular the London office market, is overdone with low levels of construction, upcoming lease events in obsolete buildings and growth sectors driving opportunities for both investors and developers next year,’ he said.

‘Good new product should be able to avoid the worst of the downturn as it offers value to occupiers on a historic basis and will be in increasingly short supply as not enough new space is being built. However, secondary space, even in London, is likely to see rental and value falls as the downturn bites. Indeed, we believe a proportion of this poor quality space is likely to be unable to attract tenants at any rent and owners will need to consider alternative uses as buildings become obsolete as offices,’ he explained.

‘The fall in prices will throw up value for those with cash and the nerve to buy. London offices in particular have seen a huge negative shift in the outlook over the last few months with take up expectations and rental growth forecasts heavily downgraded. We believe that this bearishness will create opportunities for purchasers and for developers, although the ability to act on this may well be tempered by the lack of new lending in the debt markets,’ he added.

He also believes that the weight of money from overseas and UK investors will continue to prop up prime commercial property, possibly through newly created or increasing ownership of existing REIT vehicles. But risk aversion will mean further value falls in secondary real estate are inevitable.