SLI sees coming boost for UK commercial property

Confidence should return to the UK commercial property market after "the fastest and the largest collapse in commercial property values in the last century", according to Standard Life Investments.

Anne Breen, head of property research, said she expected further price falls over the next 12 months. But she added the UK could recover in advance of the rest of the world, particularly as it repriced earlier and values its properties more frequently than many other countries.

As a result, she urged investors to look at the asset class over a three-year horizon as stability comes back to the market.

"Although property valuations have further to play out in this cycle before they can be described as 'fair value', investors should be tracking a range of recovery triggers, which would signal an eventual recovery in the sector," she said.

"Transaction pricing, the performance of the listed real estate market and improvements in liquidity and investment flows have all been lead indicators of a recovery in previous property cycles."

When the recovery does come, Ms Breen said UK commercial property will be growing from a very low base.

"In nominal terms, there has been a 40 per cent decline in UK capital values so far," she said. "After accounting for inflation, the capital hit has been similar in magnitude to the early 1990s recession, although behind the early 1970s where values fell 50 per cent on this basis."

Buying into the low valuations on offer would be eased by low interest rates and a low cost of borrowing, according to the head of property research.

"Higher property yields against historically low interest rates are likely to underpin the sector's recovery and an eventual stabilisation in prices. In the UK, the yield margin is a record 400 basis points over government bonds.

"Commercial property portfolio income yields at almost 8 per cent are back at levels not seen for almost 12 years. Adjusted for potential uplifts in rents, yields are at their highest for over 15 years."

Ms Breen said listed property, where price rises usually anticipate bricks and mortar by six months, had already mounted a recovery from its lows last year.

"Property share prices in the UK fell more than 80 per cent from peak to trough before rallying by close to 45 per cent," she said.

The head of property research said several variables had driven this rally. Investor sentiment had improved due to fiscal and monetary stimuli, substantial capital raising in the sector worldwide, successful sales and companies building up equity for new investments, she said.