The downward trend in UK commercial property values will bottom out this year according to Deloitte. Although the market will show little sign of improvement until later in the year, 2013 is expected to mark the beginnings of the long awaited recovery.
Confidence among businesses and investors is stabilising as the UK slowly emerges from recession and the economic turmoil in Europe seems to have abated. CoStar recorded over 2,000 investment transactions in 2012, with a total volume of £34bn. This is the largest total since the credit crunch began, representing a 4% increase on 2011 volumes (£32.8bn) and a 2% jump on the figure achieved in 2010 (£33.1bn).
Similarly Cpad recorded the strongest buying in commercial property auctions in December '12 since 2008, with sales rates pushing towards the 90% mark. With an average initial yield of 9.7%, prices are at levels which compensate for the risks of tenant failure, voids, obsolescence and rental reduction. The high initial income yield and long term capital growth prospects make property a very good investment alternative to low yielding gilts and volatile equities.
With the flurry of recent retailer administrations and concern for the high street this may seem a tad optimistic, but whilst retail property remains under pressure, investors have been targeting the office sector, among others, in earnest. Office investment volumes rose to £17.8 billion in 2012, a 42% increase on 2011, according to Costar.
Andy Rothery, Deloitte’s head of real estate, believes that overseas investment will be the driving force behind the projected recovery and will exceed the inflows seen in 2012, and this will be buoyed by a relatively weak pound and the desire for freehold property.
However the commercial property market remains fragmented - whilst London & the South East commanded top money with investment hitting a 5-year high in 2012, the rest of the UK has fallen further behind. And with most of the much-vaunted overseas investment going into the South East, (Cushman & Wakefield estimates this accounts for a huge 80 per cent of London transactions during 2012), the prospects for rest of the UK arguably are not so certain.
But within this very broad 'rest of the UK' category there are many attractive assets in strong locations. And with the current yield gap between prime and secondary at its widest in 15 years and a dramatic re-basing of retail and office rents outside London, these began to see more interest in late 2012, and will continue to do so in 2013 as sentiment and appetite for property risk improves.
Nevertheless, with the availability of new debt for secondary property unlikely to improve in the coming year, taking advantage of such opportunities will take skill and a hefty downpayment.
Some of the content in this article has been paraphrased from recent market updates by Costar, Movehut, Cpad and CBRE. The Greater London vs Rest of UK chart was produced by Costar.