Peak to trough, UK commercial property prices are down 41.4%, according to Investment Property Databank. And this is why some experts believe you should start clambering back into the market. Real-estate investment trusts (Reits – listed property companies) are yielding more now than the average equity-income fund, while commercial property trusts are trading at discounts that more than account for the drop so far in capital values. In fact, so attractive have prices become, that you can now “buy into underlying property at 1997 prices”, says Tim Cockerill, head of Research at Rowan & Co in Fund Strategy.
Tempted? Try not to be. Prices have fallen a lot. But they have further to go. Capital Economics predicts a 25% fall in annual rents in the City of London over the next one to two years. Morgan Stanley believes institutional-grade property could fall by a further 25% from December’s prices. Up until now, prices have only fallen because of reduced demand, they say. “We have not yet seen any pressure on values owing to distress.”
Sitting on the sidelines, big institutional investors seem to agree. “People talking about green shoots of recovery have been spending too much time looking at the bulbs in their garden,” Mark Preston, head of London-based property firm Grosvenor, tells Bloomberg. With £523m to invest, he is waiting for more “compelling opportunities”. US fund group Franklin Templeton agrees. They’re raising $700m for several real-estate funds, but won’t invest until the banks start flogging off distressed property at firesale prices. “We are going towards a distressed sales situation, but we’re not there yet,” managing director for European property, Raymond Jacobs, tells Reuters.
So even though Reits, such as Land Securities, are yielding 11%, steer clear of UK and US property funds for now – your money would be better invested elsewhere for the moment. If it’s property you’re interested in, Asia is one option. Listed Reits are not as highly geared as UK counterparts, while rents are not falling as fast in cities such as Singapore. Ascendas-Reit (SP:AREIT, also known as A-Reit), which runs a portfolio of business parks and industrial premises is our top pick; Ascott Reit (SP:ART) also looks attractive, if higher risk. Running serviced residences across Singapore, Thailand and other Asian countries, it’s down 54% over a year, but boasts a 15.7% yield.