It’s time to buy UK commercial property: strategists

Posted by luxuryasiahome on  November 28, 2009

Prices rose 1.9% in Oct, the biggest gain since Dec 2005

FIRST, it was corporate bonds; then stocks. Now it’s time to buycommercial real estate in the UK, according to strategists in Edinburghadvising on about £400 billion of assets.

Standard Life Investments is telling investors to considerincreasing the proportion of money they hold in stores, officebuildings and warehouses, said Andrew Milligan, head of globalstrategy. Today, the commercial property market compares with wherestocks were about seven months ago, said Mike Turner at Aberdeen AssetManagement Plc.

‘It’s the last major asset class where there is still a higher riskpremium than warranted, so we’ve been looking at it,’ Mr Turner said inan interview at his office in the Scottish capital. ‘April is a goodexpression of the stage we’re at, just off the lows and starting togain some traction.’

After gains this year in stocks and corporate bonds, Scotland’*****iggest fund management firms are honing in on where they reckon moneycan be made next. UK commercial property prices rose 1.9 per cent inOctober from the previous month, the biggest gain since December 2005and the third straight increase after more than two years of declines,according to Investment Property Databank Ltd. Values are still down 42per cent from the market’s peak in June 2007.

Land Securities Group Plc, Britain’s largest real estate investmenttrust (Reit) by stockmarket value, said a week ago that the marketstarted to recover earlier than it had expected. ‘Now looks a good timeto consider what the strategic weightings for property should be,’ MrMilligan said at his office in Edinburgh’s Georgian city centre. ‘If weare at the start of a subdued but normal economic recovery, then veryclearly property will inexorably become more expensive.’

Aberdeen, whose headquarters are in the oil city of the same name,and Standard Life and Scottish Widows Investment Partnership, bothbased in Edinburgh, are Scotland’s three largest fund managers.

Standard Life oversaw £137 billion on Sept 30, while Aberdeen had£129 billion on June 30. Scottish Widows runs about £135 billion aftertaking on money from another part of parent Lloyds Banking Group Plc.

Scottish Widows started adding to UK commercial property investmentsin September, moving to ‘overweight’ in its mixed-asset funds from‘underweight’ the previous two years, said Ken Adams, head of globalstrategy.

‘UK commercial property is cheap, and cheaper than stocks,’ Mr Adamssaid in an e-mail. ‘Credit is, broadly speaking, close to fair value.’

They all expect stocks to continue to rise in 2010, though not asmuch. Mr Turner predicted increases of less than 10 per cent formarkets next year, while Mr Adams forecast a total return of 10-15 percent over the next 12 months.

The MSCI World Index is up 26 per cent this year. The index hasgained 68 per cent since March 9, when it was close to the lowest levelsince at least 1995.

Mr Milligan said a key catalyst for the markets next year will behow central banks and governments around the world withdraw measuresdesigned to tackle the financial crisis. For example, the Bank ofEngland bought bonds to increase the amount of money in the market.

‘We certainly see the stock market continuing to improve into 2010and we should see more evidence that companies are able to generateprofits and investor confidence should improve,’ Mr Milligan said.‘We’re certainly warning clients that there could be more volatility.’

When it comes to commercial property, the strategists are stillreticent about the US market because they said prices may have furtherto fall. In the UK, yields on shopping centres and offices have jumpedas prices fell.

‘We’ve put money into UK commercial property funds,’ said Mr Turner.‘We’re not anticipating any significant capital performance, but justthe yield alone.’

Prime malls in Britain yielded 6.85 per cent in October comparedwith 4.85 per cent two years earlier. For offices in the City of Londonfinancial district, yields rose to 6.5 per cent from 4.75 per cent,according to data from property adviser CB Richard Ellis Group Inc.

Source : Business Times – 28 Nov 2009