Still in demand

Historically, we are in the midst of the season in which the market shakes off its winter hibernation to generate a hike in activity. Obviously these levels currently remain some way down on historic highs. Yet there is no getting away from the heightening degree of confidence coming from the market. This increased positivity will also work to help influence the decision making process of developers and investors who are also looking to become more active in both the residential and the commercial property markets.

Unfortunately in many cases, the necessary funding is not always available and some developers are still being left to kick their heels on the sidelines waiting for the opportunity to enter the commercial market. Of course there are providers still lending but conditions nonetheless dictate that there will not be an immediate rush back into the market for those providers looking on from the sidelines.

Of those still lending, it is inevitable that criteria has been tightened and that they will continue to cherry pick borrowers. This isn’t a criticism: after all it’s difficult to criticise any institution that is actually still lending especially those who have continued to be able to throughout the recession.

However, it’s certainly not all doom and gloom. There is growing evidence that we are experiencing somewhat of an upturn in UK commercial property after this sustained period of liquidity problems. Retail investor money is said to be once again flowing back into commercial property via daily dealt ‘bricks and mortar’ funds, according to wealth manager HFM Columbus but it also issued the warning to investors that the sector still has potential dangers and not to become over exuberant.

Some of the current factors influencing the current commercial market include:

- The IPD UK All Property total return index has produced a series of strong monthly returns – aggregating to a return of nearly 20 percent over the nine months from the market bottom last summer to the end of March 2010.
- Supply and demand outlook for property has improved but the recovery is still only at the tentative stage.
- Prime UK property is a preferred investment for overseas buyers, attracted by both the weakness of sterling and by lease structures that are more attractive than elsewhere in continental Europe.

In addition to these, the latest RICS UK Commercial Property Survey suggests that rental expectations rose dramatically for London offices, moving above zero for the first time since the last quarter of 2007 as available space declined for the second consecutive quarter. This is the first time that more surveyors have reported an anticipated rise in rents for two years.

RICS say that commercial property lettings activity continues to pick up across office and industrial property for the second consecutive quarter, although investment demand has moderated somewhat outside the London metropolitan area.

Confidence in the outlook for lettings has also increased, but sentiment was slightly less buoyant than at the end of the fourth quarter of 2009. Some surveyors voiced concerns over the impact on regional lettings activity of public sector employment cuts due to come following on from the election.

It’s good to be in a position to write something positive about the commercial property market. Indeed commercial property has been the biggest theme in many fund sales of late, coming top of the Investment Management Association’s best sellers list for four consecutive months.

While the indicators for the year ahead are good it’s important not to run before we can walk. Projected interest rate rises and spending cuts could both be factors that may put the brakes on the rental growth that the market needs to sustain its recovery.

So for those increasing numbers of investors looking to the market it is vital to choose the right property or fund in terms of potential diversification and income. Let’s hope this revival will continue in its momentum. However, history shows that caution also has to remain evident in all our portfolios.