Commercial property returns at new low

Published on Saturday 5 April 2008 16:02

COMMERCIAL property has produced the poorest returns of any investment market for the first time in 20 years, according to a report due out tomorrow from one of the UK's biggest real estate companies.

According to the latest figures from Jones Lang LaSalle (JLL), the commercial property investment market produced an average return of -5.5% last year, plunging it to the bottom of the investment list for the first time in two decades.

This figure compared with an average yield of 5.3% from the equities markets and a 6.4% return on bonds.

JLL says the market was dragged down in the second half of last year when interest rates peaked at 5.75% and banks damaged by the credit crunch became increasingly unwilling to lend significant sums.

Returns plunged into negative territory, bringing to an end a 14-year boom in the sector. Many life and pension firms, including Scottish Widows and Aegon-owned Scottish Equitable, were forced to introduce delays on withdrawals and transfers from property-linked funds as investors rushed to reclaim their money.

JLL is taking a cautious approach to 2008 and expects the number of transactions in the market to "increase slowly" after particularly large deals dried up at the end of last year.

The company says cash-rich "opportunistic" or "vulture" buyers are beginning to recreate demand.

Cameron Stott, director at JLL, stressed the market is picking up again. "The feedback I'm getting is the level of redemptions hasn't continued at the level that was anticipated," he said. "If anything, there's maybe a degree of stability that has come in.

"One of the reasons for that perhaps is the instability in other markets, particularly the equities market. Equities over the last few months have proven to be as volatile as the property market was.

"Yes, there are still redemptions but there always are. The high level at the end of 2007 doesn't seem to have continued."

According to this latest report, the commercial property market has, however, remained on average the most lucrative sector for investors over the past 10 years.

But other groups are warning that the situation in the commercial property market could deteriorate further in the next couple of months. Legal & General Investment Management warned last month that the days of falling prices in the market are far from over.

Legal & General is anticipating prices could drop a further 15% in the coming months before bottoming out later this year.

Commercial property consultants Drivers Jonas, which has offices in Edinburgh and Glasgow, is predicting zero growth for the whole of 2008. It says the market has done a u-turn since January 2007 and supply now far outstrips demand.

At the beginning of last year, 10 buyers existed for every commercial property on the market, whereas now there is only one potential buyer for every 10 sites up for sale.