UK commercial market to recover later this year

The UK commercial property market will begin to recover later this year and selective entry into this market could provide excellent risk-adjusted returns, according to a new report by Cordea Savills, the international property fund manager.

The report predicts that by the end of 2009 UK capital values will have fallen around 50% from their 2007 peak, yet argues that this short-term distress is creating a 'window of opportunity' for investors to purchase high-quality commercial property, with secure income, at attractive prices. For investors with euros or US dollars, entering the market during this decline could offer even greater opportunities with a 20% retreat for Sterling giving a 70% peak to trough fall in capital values according to market indices, the report said.

The fund manager signalled the emergence of a two-tier market for commercial property in the UK. ´This is reflected by an increasing demand for prime property and continued malaise in the secondary market. Prime assets with very long dated income (i.e. leased to tenants for over 10 years until first break) that are let to high-quality covenants have been recognised for their exceptionally well priced, low-risk income (circa 7.5% per annum). Investors have started once again to refer to the 'bond-like characteristics' of such property investments. This contrasts starkly with properties let on shorter leases, with weaker covenants or development opportunities, which have yet to really see any purchaser-led demand return.'