Sarah Cockburn: Investors looking for rental growth rather than capital value

THE UK commercial property market has now stalled after a period of capital growth since mid-2009. In fact, during the last quarter capital values have fallen slightly.

Despite this, property industry commentators are forecasting positive total returns from property over the next five years. However, the focus for property returns is likely to continue to come from income returns rather than capital growth.

Investors continue to be risk-averse and we have seen a renewed “flight to quality” such as prime London locations. Investors also continue to be selective in acquisitions, with a limited market for larger properties valued above £40 million outside central London, where there could be downward pressure on values except for the best assets.

We believe there is also a risk of further value falls for secondary properties. Despite this, some investors are seeing this area of the market as an attractive buying opportunity if the pricing is right.

Prime locations remain strong, and there continues to be strong demand for London offices and multi-let industrial premises in the South East of England that are let to good tenants on long leases. The majority of property fund managers and investors continue to look for prime or good secondary properties which have genuine prospects for rental growth rather than concentrating on the increase in capital value at this time.

The main demand in the UK market is from sovereign wealth funds, Germany, the US, Middle East and also selective UK Institutions and property companies. London continues to attract most investment interest from the overseas market for its “safe haven” status and where values are seen to hold.

• Sarah Cockburn is a property fund manager at Edinburgh-based Kames Capital