The following article was provided by James Thornton from Mayfair Capital.
The bottom of the market for commercial property, following the onset of the credit squeeze, was reached in July 2009. Since then the market has recovered around 16% in capital value terms but the rate of capital appreciation, as recorded by Investment Property Databank, has now stabilised. The market has recovered from an oversold position to the point today where the yield available from commercial property is virtually double that available on 10 year gilts and the dividend yield of the All Share Index. For this reason, the asset class has returned to favour, with income seeking pension investors, charities and private investors. Confidence has returned in the asset class as a source of diversification in investor portfolios.
Where does the market go from here?
Supply/demand imbalances are creating conditions for strong rental growth in central London offices and retail but rental value decline remains a feature in regional markets. With the economy slowly recovering however, supported by an improved performance by UK exporters, rental growth can be expected to resume in 2012/2013 as vacant space is taken up against the background of limited new development.
Looking forward, whilst the recovery has been broadly based, a wider dispersion of returns can be expected in the future. For instance, in the retail sector, retail warehousing is performing much stronger than shopping centres and high street units, where vacancy ratios continue to rise. Geographically the South East and London are likely to outperform the regions over a 3 – 5 year period. Stock picking is therefore going to be a highly important criteria for investors.
Consensus Forecasts are suggesting a 5 – 6% total return in 201 rising to 9.2% in 2012. Even allowing for an inflation rate which remains stubbornly high, with income providing the primary component of returns, property has an integral role to play in SIPP and SSAS portfolios.