Time to get ready for a change of pace

Compared to what we expected, 2009 turned out to be a benign year for the commercial property market. Yet that could all change in 2010. Much of 2009 was characterised by a shortage of supply. There were hopeful investors, but only at distressed prices. As properties came to the market, the buyers snapped up what was available. As a result, prices crept modestly upwards, especially for premium properties.

My fear for 2010 is that the uplift of 2009 – which was due to short supply – could be seen as a window of opportunity for anyone looking to offload assets; whether it’s CMBS, balance sheet lenders, VC companies or any other investor. The result could be a market deluge and almost the complete opposite of our current market.

During the first quarter, I think we will see an increase in the supply of properties in the market. The real question is whether there is a sufficient market of potential purchasers.

If the only purchasers prove to be high yield opportunity funds, we could be in for a rough ride and the market could suffer a downturn. However, if purchasers looking at long term yields and the fundamentals of asset management come to the market we can hope to see a continuance of the improving market.

In 2010, we are likely, but by no means are certain to, have a change of Government. While I do not think this should have an impact on the market, it may be a factor that either discourages or encourages a sensible market.

Along similar lines, it is also necessary to look at the UK market in the context of Europe and the rest of the world. This is perhaps most important where there is not just a general impact of the global recession and our climb out, but on specific markets or geography, the best example being Financial Services and London.

Contrary to what many people might realistically have predicted, Central London real estate is doing remarkably well, especially for grade A office space. In reality, with a few exceptions, it was not Armageddon for the City, and the yields from their Class A investments with long-term covenants are proving very attractive in the current markets. To place this into context, a pension fund may struggle to find a yield of much more that four to five percent in other assets, whereas 5.5 to seven percent is not an unrealistic figure for grade A space so demand is, and will continue to be, strong.

To reinforce the point that grade A in London is robust, we are seeing some very resilient trends in the new build sector – trends which I predict will continue into 2010. Rent-free periods are being cut fairly dramatically, properties that a year or even six months ago would typically have been offered at four years are now offered at three. This is likely to tighten further as the supply of new space is diminishing. Ergo, tenants waiting too long to sign their pre-let agreements could find that they lose out.

For people and funds seeking higher yields, B grade assets are proving attractive and I predict increased demand for a couple of reasons: firstly, the current stock is undervalued and therefore has upside potential. Secondly, some assets have been poorly managed and buyers with the relevant in-house or outsourced capability can easily generate upside opportunities.

Finally, 2010 could be a boom year for lawyers and indeed servicers, as we will continue to see an upward trend in defaulting loans, regardless of whether commercial real estate prices hold firm.