UK commercial property questioned in 2011

Commercial property enjoyed a bumper 2010 with returns of approx 15%. However, whether 2011 will prove to be as successful remains to be seen.

Property has always played an important role in pension schemes’ investment portfolios and while investors endured rocky times during the financial crisis, their patience was rewarded with returns of 15% in commercial property last year. Such a strong rebound was largely unexpected, according to Aberdeen Asset Management’s director of UK property funds Rod Ross.

“We are at an interesting point in the commercial property market as we are coming off the back of the sharpest market recovery that we have ever seen,” he says. “The speed with which investors have come back into the market is unprecedented, with IPD showing commercial property returns of 15% last year. We thought 2010 would return no more than 11%-12% so we had a very strong year.”

While it is cheering to see such a strong rebound in a market, other commentators are keen to play down the figures and argue that they need to be put in context of the dramatic falls seen during 2008 and the early part of 2009.

“The market did undoubtedly recover strongly in 2010 but this was off the back of falls of around 45%, so we remain well below peak values,” says Aviva Investors investment strategy and research director David Skinner. “However, we believe the UK market is fair value and we would say that over a five-year time horizon we would expect returns to be pretty robust.”

So with this in mind, how far does commercial property have left to go? There is no doubt that there is real demand for commercial property but how far will this demand go? Are we to expect another surge during 2011 or is the huge growth experienced pre-crisis to remain a dim memory?

According to Hymans Robertson property manager researcher Linda McAleer, the outlook for commercial property in the UK will remain steady rather than stellar.

“We were not too surprised to see the strong rebound during 2010,” she says. “By mid-2009, valuations had started to look compelling and this attracted a wall of money into the UK commercial property market, not least from overseas investors able to benefit from the weakness of the pound. Investors began to realise we were near the bottom of the market and so we saw a lot of investors including pension funds moving back into the market.”

McAleer believes that fundamentals are now starting to stabilise and that the outlook for 2011 will be quite flat. This is a view shared by several industry commentators including PRUPIM deputy head of research Richard Gwilliam who also believes the market to be fairly priced right now.

“We aren’t expecting the recovery to be a strong one,” he says. “Indeed we expect 2011 to be fairly steady. We believe rental growth will recover modestly, though as yet we are unsure as to how much of an effect public sector cuts will have.

However, a lack of new construction means there is a lack of growth in supply so there is room for optimism and we could see single digit returns for 2011.”


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