PropertyJan 22 2014

Commercial Property: Sector builds on turnaround growth

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      CPD
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      This pick-up in demand for exposure to real estate has been the catalyst for capital appreciation in almost all sub-sectors of the market.

      UK commercial property is attractively priced as an asset class with an expected annualised return of around 8.7 per cent for the next three years, the backbone of which is a relatively high and stable income return.

      A strengthening outlook for the UK economy built on improving business and consumer confidence further underpins the case for the asset class which, at its most fundamental level, can be viewed as a factor of production with an expanding demand.

      Business investment is now expanding as corporations become more confident about future profitability, a crucial requirement for sustained expansion. It has been a considerable time since the UK economy has enjoyed positive news of this scale and magnitude.

      Understandably rental growth (while a lagged response) occurs when the rate of gross domestic product accelerates, as is anticipated in the current economic cycle.

      While this may be more muted than previous cycles, a rate of rental growth of around 2 per cent is a reasonable all-property market growth assumption, although most likely focused in certain sub-sectors and regions of the UK.

      Returns improved quarter on quarter through 2013. The year started with a modest capital decline that had evened out to income by the mid-point in the year. The asset class delivered a total return of 2.8 per cent in quarter three, which was the highest level of quarterly performance since the final quarter of 2010 and an improvement on the 1.9 per cent recorded for the second quarter of last year. Quarter four returns for 2013 are expected to be higher still and will push annual returns to approximately 10 per cent – a remarkable turnaround for an ungeared, lower-risk asset class.

      I am forecasting double-digit total returns for 2014. I expect this to be driven by a broadly equal combination of income return and capital growth. The forecast for the next three years should also hearten investors as I anticipate a relatively stable, annualised total return of around 8.7 per cent.

      Crash

      Even though memories of the wider crash of 2007/2008 are still quite fresh, property has out-performed equities and gilts in total return terms since the start of the millennium and investors are taking notice of the strong fundamentals in an asset class which remains around 30 per cent below its previous peak in 2007.

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