Commercial Property Looking Attractive AgainPosted on: 02 June 2009 by Gareth Hargreaves
Independent financial advisor Peter McGahan picks up on some positive news in the commercial property sector.
Well who would have thought it? My first article on the potential for loss in property was back in 2003 as a warning, followed by a series of ‘get out’ signals from 2005.
The key issue with property was liquidity. Unlike a share which has numerous potential buyers for sellers, property dies, and if you are stuck with the asset, it’s a bad day at the races. I first learned this with my purchase of a house at age 19 which I couldn’t get a viewing for in the next eight years - lesson learned with my own money!
But after a battering is property likely to return? Firstly we need to understand what property means.
You have residential property, commercial property and property shares. Residential property will be under stress for at least another two years before I will buy the fixed asset itself, but over the next year there will be lots of opportunity for the canny investor to make money by buying close to the low. Don’t expect a quick bounce on the capital value though – it’s a long cycle.
Anyone can report on what is happening today or yesterday in any market. That’s poor journalism which fuels greed and fear and causes markets to boom and bust.
Foresight is the only servant of the investor. And so I come very close to the first point in five years where I believe that property could represent a good buying opportunity. Property shares respond earlier than the actual commercial property asset but the signs are there that commercial property is looking attractive again. There is a cycle to contend with and in this cycle I would be looking to purchase the shares before buying back into the actual fixed asset itself. Let me explain why and how:
Property shares have been battered. Take Aberdeen property share which is down 37.9% in 2007 and down 47% in 2008.
Much of what has driven the price down was justifiable fear, but here are the reasons I believe the next few months will represent a good opportunity:
There was considerable concern that banks would offload lots of their property but this is not happening, so supply is controlled. The restructuring of banks’ capital means they will also not need to immediately foreclose on any assets where the customer is struggling. Instead they are happy to roll over property loans given that interest rates are so low, also, we are not in the double digit interest rate market we were in for the last crash.
Furthermore banks are beginning to lend again on commercial property. Interestingly German banks are more than interested in this market as are German purchasers. With depressed assets and a weakened sterling against euro these German buyers are enjoying a near 70% discount. Buyers are clearly coming to the market with foresight to get in on the bounce. Now its not that commercial property will immediately bounce as we have said before, it’s the anticipation of when it will that is driving the property share market.
The big purchasers are already making all the moves. Great Portland Estates and other leading specialists with more than enough cash have interestingly announced rights issues. Why when you have enough cash would you do that? Simple. It’s to raise extra cash to buy distressed assets at the bottom of the market. Clearly the London office market is hammered. The return to this market is likely to be closer to 2012 than now, but values of the investment will already be fully reflected by then.
Right now there are plenty of forced redemptions from funds that are heavily indebted and simply need to sell the asset. Few buyers equals depressed price hence the vulture like movements above to gobble assets at their cheapest price.
Most interestingly is the fact that London and Stamford are also expected to be fully invested by the end of June, a clear sign of their focus. More on this again next week and how to buy into the property shares at the right price i.e. a discount.
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