Property Update

By Danny Cox | 28 Jul, 2008 

After a glimmer of better news in the commercial property sector from Threadneedle a couple of months ago, M&G’s July UK Commercial Property Market Outlook reports a material deterioration in the market. M&G have revised their forecasts downward for 2008 and 2009. This makes sense given the ongoing effects of the credit crunch, slowing economy and rising unemployment.

M&G report worse than expected rental growth as occupier demand falls and suggest that the chances of banks forcing distressed selling is increasing.

M&G have adjusted their forecasts predicting greater falls in the commercial property sector this year, relatively flat next year, but with a sharp rebound in 2010/11 and 2012. This rebound, they predict, will be driven by increasing yields, expected to go to 7.25%, which are already more attractive than overseas property markets.

As with all forecasts, some groups are more pessimistic than others and no one will know who was right without the benefit of hindsight.

This supports my view that it is too early to start putting new money into commercial property funds and, as with all investments, you would expect the better quality funds and managers to lose less in falling markets and gain more in rising markets.

NB. Property funds give you exposure to an entirely different asset class, the valuations of which are generally affected by different factors to conventional equity funds. Valuations will inevitably include an element of subjective opinion. Commercial and residential property have different risk profiles and the returns from one won’t necessarily follow the other. Liquidity can be a problem therefore the manager reserves the right to delay settlement of any withdrawal instruction from you for a period of up to 6 months. It should be remembered that like all other investments their value, and the income from them, can fall as well as rise.