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Space shortage to bolster commercial property market

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Returns from the UK commercial property market are likely to moderate after the spectacular resurgence of the last year but a dip in values remains an unlikely outcome, according to research published by Prupim, the real estate fund manager.

Prupim’s UK Real Estate Perspective report says an easing in the rate of total returns beyond 2010 is the most likely scenario, with strong demand for scarce investment grade commercial property helping to mitigate the effects of the weak economy.
 
“Strong double digit returns for 2010 and steady returns beyond that date appear the most likely outcome for institutional investment, with a dip in values relatively unlikely. The mixed economic picture, the sharp decline in public spending and the fact that UK commercial property had over-corrected a year ago, all suggest that the remarkable increases in capital values of the last year are likely to be followed by a period of relative stability,” says Richard Gwilliam, deputy head of property research at Prupim.
 
Prupim says prime UK commercial property generally remains fair value, and offers better prospective returns than government bonds, with less risk than equities. Central London is the most buoyant UK market, partly because of a development drought, which is also visible elsewhere. Across the UK, industrials and parts of the office sector currently seem most attractively priced for long-term investment. Retail currently appears more expensive.
 
“Given wider economic jitters, the investment market still prefers security of income today over gambling on the future: southern property is preferred over northern, small and medium lots are preferred over large: and prime property is very strongly favoured over secondary assets,” says Gwilliam.
 
“We expect that the yield gap between prime and secondary must widen from here – probably through secondary prices having to fall to clear the market. Core investors will seek wealth preservation and security of income in the UK’s most prime markets but some opportunistic investors will begin to fish around for deep discounted secondary stock,” he adds.
 
Prupim expects to see a continued increase in activity in ‘new’ markets, such as supermarkets and budget hotels, where decent covenants offering long, inflation-linked, leases through sales and leasebacks represent novel forms of secure, prime stock.
 
“An improving occupier market and a large spread between bond and property yields suggest that property values are likely to hold up. Fund managers will be closely watching to see if global economic headwinds and a weaker than expected recovery in occupier demand lead to deterioration in the market, but the low levels of supply would ameliorate this to some extent,” says Gwilliam.

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