Workers in the City have had a rough few weeks, so they won’t want to be reminded that economic forecaster Experian expects 20,000 of them to lose their jobs in the wake of the financial crisis. Experian’s report will be particularly sickening for one financial cohort – the commercial property sector. As banks tighten their belts and financial workers are let go, the City can expect to see a 10% drop in rents paid for commercial property over a two-year period, according to analysts at JP Morgan.
It’s misery piled on misery for commercial property fund managers. Investors have been clawing back their money and those funds with a high level of borrowing are getting very nervous about keeping up with payments. Funds are now faced with the prospect of flogging property as quickly as possible, or telling investors they’ll have to wait for their cash. Several of the country’s largest funds have already put a freeze on withdrawals for three, six, or even 12-month periods, panicking many of their remaining investors in the process.
Commercial property prices have already dropped by 15% since the summer and there is no sign of the freefall slowing up. According to Jones Lang LaSalle, the world’s second-largest commercial real estate broker, transactions in the UK slumped 60% in the final quarter of 2007, the biggest drop since 2003. Analysts are now predicting negative total returns – rent and property prices – from the sector this year, says George Hay on Breakingviews.
And even as demand is falling, supply is rising, with another 3.4 million square feet of new property to be added to the City this year, resulting in vacancies rising to 8% in the near future. So don’t be fooled by the fact that funds look cheap, with some valued at 30% or more below their net asset values – because there is every chance that the discounts will widen even further.
Far smarter to invest in commercial property funds that tap the Far East residential markets, such as Hong Kong. With its currency pegged to the dollar, the city state has been dropping interest rates in line with the Federal Reserve. Housing transactions are soaring, with Merrill Lynch predicting a 50% jump in prices over the next two years.
The Sunlight REIT (HK:0435) offers a 5.6% yield, while the Regal REAL Estate Investment Trust (HK:1881), investing in hotel properties, is another good way to go.