Investing In Commercial Property Still Offers The Potential For Greater Returns Than Alternative Asset Classes

11 November 2009

After a period of unprecedented growth, no one could deny that the commercial property market has experienced one of the lowest levels of activity since the beginning of the decade. As we approach the end of another challenging year, the question we must ask ourselves is whether the market is seeing signs of recovery. Alternatively, will it be more of the same during 2010?

There is no doubt that for much of 2009, the banks' lack of liquidity meant that they had limited funds available and that investors, due to the drop in the value of assets and loan to value ratios, were not subsequently in a position to invest. In recent months, we have noticed a shift in sentiment as investors not restricted by the lack of bank finance are coming back into the commercial property market tempted by the opportunity to acquire good-quality product at competitive prices. Institutional investors, pension funds, trusts, cash-rich private companies and individuals are taking advantage of the fact that some sectors of the market, particularly prime property, have experienced a bottoming-out of yields and are injecting capital once more into this sector.

Take last month's commercial auction held in London by Allsops, one of the UK’s leading auctioneers and property consultants, which achieved a 93% success rate for its organizers who hailed it as their most successful October auction since 2006. A total of £83.2 million was raised on the day with lots achieving 15% on average above their reserve prices. Interestingly, the largest lot sale price achieved was £3.3 million with the average lot size coming in at around £660,000. Overall, Allsops report total auction sale proceeds for this year as amounting to £369 million, which represents a 35% increase on 2008 sales figures. The company attributes this increase to a combination of cash-rich buyers coupled with a restricted supply of properties and realistic pricing, which it claims has helped stimulate sales during the past year.

Closer to home, we are seeing a distinct resurgence as private local investors come forward to acquire good-quality stock. Most recently, a number of sale and leaseback opportunities brought to market by one of the province's main clearing banks shows that that strong prices are still achievable - indeed, some of the deals in which we have been involved this year support this theory. Notable deals include the sale of a new-build Tesco Food Store in Enniskillen for £12.75 million, a local investor's acquisition of premises within a landmark new town centre scheme in Barking, Greater London in a deal worth £5.3 million and the sale of a property currently let to M&S Simply Food in Coleraine for over £1.75 million.

All of this is very encouraging: the fact remains that debt buyers and not simply cash-rich buyers need to come back into the market if it is truly to re-gain ground. Therefore, we do need the banks to start allocating funds both for long-term investment and development projects currently on hold.

From a broader perspective, the key to future sustainable investment is how the shift in the property market that we have witnessed over the past eighteen months is handled. There is no doubt that existing property owners and investors will have to focus extremely hard on managing their assets in order to maximise returns. Now more then ever is the time for sound advice and strategic asset management, an area in which we have been extremely proactive over the past few years.

While loath to strike more than a note of cautious optimism regarding the market bouncing back, I am convinced that the opportunity to invest in quality property that offers considerably better returns than other investment vehicles, particularly bank deposit accounts, will stimulate activity levels and that investors will start to come back in greater numbers. We could do well to heed the words of the man lauded as "the world's greatest moneymaker", Warren Buffet, who once said, "Be greedy when others are fearful and fearful when others are greedy". Taking a bite out of the market is infinitely preferable and ultimately more profitable than nibbling around its edges, surely? After all, we should not lose sight of the fact that property historically has been and looks likely to remain a preferred asset class and, as such, is a solid investment vehicle for those who have access to funds be they individual or institutional investors.

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