Commercial Property Investment – “the Recovery”

10 May 2010

In recent months, we have seen strong signs of recovery within some sectors of the commercial property market. It should, however, be noted, that any shoots of recovery tentatively poking through are primarily confining themselves to mainland Britain. In contrast, although conditions have stabilized in Northern Ireland, signs of recovery within the property market have only recently become apparent. Commercial property prices in Great Britain appear to have stabilized as yields settle to more sustainable levels and greater emphasis is placed on bringing quality stock to market. In fact, according to recent GB property reports, capital values have increased by 8.1% during the past year.

The resurgence that has occurred can be attributed mainly to institutional and fund investors, who are returning to a market that they once dominated and buying into cities presenting solid, income-producing, quality properties. The fact that fund managers and institutional investors are diversifying from other asset classes and investing more widely in property is vital in order to stimulate the market and helps to redress the balance between private investors who had been active in recent years and institutional investment.

Looking closer to home, it is evident that Northern Ireland finds itself in a unique position when compared with other UK regions. For a start, there is our involvement with the Republic’s newly-formed National Asset Management Agency, (NAMA), which affects us directly. The extent of NAMA’s impact upon the Northern Irish property market and precisely how the Agency is going to operate remains uncertain: only time will tell how the process is going to evolve and what its eventual outcome may be.

Admittedly, there has been a degree of concern within the property industry regarding how NAMA will operate, however, we should be mindful of the fact that the agency’s key function is to provide stability and act as a mechanism for recovery across the Irish property market. Since local property values have declined more dramatically, the issue of funding has had and continues to have a more adverse impact upon the market. Our lenders are still extremely reluctant to fund both new purchases and finance existing stock requiring further development to maximise values. While investment transactions have occurred within the lower price bracket of £1-2 million, anybody trying to purchase property above this price level is finding it difficult to secure the necessary funding especially with increased equity to debt ratios.

On a more positive chord, it is encouraging to note that many of our local investors who own properties on mainland Britain are seeing signs of recovery in terms of yields and values. Undoubtedly, this is helping to restore market confidence and promote further transactional activity.

Ultimately, the commercial property market cannot be allowed to stand still. To operate effectively, it requires injections of cash so banks need to start making adequate funds available to investors in order to kick-start our local recovery. To paraphrase Gordon Brown’s comments made during the first Election Debate last month, the decision whether to put funds into the economy or take them out of the economy is just as pertinent for the banks as for Government, and it will be interesting to see what the former’s response will be!

Regaining some of the confidence that has been lost on the part of both investors and funders is crucial. Local investors who entered the market purely for short-term gains have realised that they will need to devise strategies for the medium to long-term management of significant parts of their portfolios. This is why we have been heavily involved in working with our clients on developing and implementing strategies for their properties both here and elsewhere in the UK.

There is no doubt that the market will be challenging going into 2011, however, I do think that there are definite signs of recovery, which will engender more realistic and sustainable market conditions, and that property will continue to compare favourably with other asset classes as a vehicle for investment.