Asset Management Expertise Critical In Uncertain 2012
Pamela Gray, Richard Higgins and Ian Forbes of CKD Galbraith offer their predictions for the commercial property investment market in 2012.
2011 was a tricky year for the commercial property market: fewer transactions, a widening yield gap between prime and secondary assets, risk-wary investors continuing to sit on their hands and continued restricted availability of bank funding. Then add to the mix the Eurozone crisis at the end of year, which saw the market weakened further by increasing uncertainty. On a positive note, there were fewer distressed sales than anticipated.
2012 looks set to be equally challenging.
Richard Higgins, Commercial Investment Partner, said: “Adopting a holistic approach to investment, agency and asset management is required for 2012. More than ever, it’s absolutely vital to work assets hard to maintain income and value.”
The Eurozone crisis remains unresolved, resulting in further market uncertainty. An unravelling, breakup or default of the Eurozone is still a possibility, leaving the UK exposed. Recent pressure from Westminster to force the Scottish Independence referendum highlights this political and structural uncertainty. However, looking at long-term historic returns, there is an opportunity for purchasers with cash or affordably funded debt to make strategic medium and long-term acquisitions.
As ever, careful selection and management of assets is imperative.
Lack of supply
While the London and South East markets experienced higher transactional activity driven in part by foreign investment, activity in the regions and Scotland was limited, particularly in secondary markets.
Looking ahead, development activity will be limited due to lack of funding and the reluctance of developers to take the risk of promoting schemes through the planning process. The effect in the medium term will be a shortage of space just as market demand increases.
Richard Higgins continued: “The lack of development in conjunction with aging stock may stretch the definition of prime in the medium term, resulting in cautious investors looking at opportunities that are currently considered as more secondary or even seeking alternative asset classes. If this coincides with the banks loosening their reins and looking to compete for market share, it should lead to an improvement in the secondary market. However, this is looking far into the future.
“Conversely, there is concern that distressed secondary property will be released to the market in some volume from either lenders or speculators who are purchasing portfolios of bank controlled stock currently. This could effectively neutralise any upturn.”
Widening yield gap between prime and secondary
Since the end of 2010, prime yields have stabilised to levels similar to those seen pre-downturn. In contrast, secondary yields have continued to soften.
Ian Forbes, Associate Investment Agent, said: “Many investors remain of the view that the yield gap between prime and secondary is not worth the risk. It’s this contrast between prime and secondary where the real problem lies, with significant activity almost solely limited to prime stock.”
2011 saw secondary and regional stock continue to suffer with yields moving out and extremely limited demand for short unexpired lease terms or poor covenants.
Ian Forbes continued: “Highly geared, risk-taking purchasers have been out of the market since 2008, which has coincided with the lack of secondary demand. Investors in this market have many investment opportunities and expect substantial returns for their effort and the risk. For the secondary market to improve in the short term, funding must become available and affordable once again. However, as many of the traditional funders are simply not lending, we see little scope for change in 2012.”
Occupier market - The two-tier investment market shadows a two-tier occupier market across all sectors with the secondary occupier market remaining generally very weak, albeit there are pockets of continued growth across all sectors, depending on the location.
Indeed, prime rental growth has moved back to zero, which is an improvement on previous negative growth.
Local markets will drive occupier demand.
It is not clear where capital values will be this year. There is potential for further reductions, however, this is wholly dependent on local market and supply and demand.
An interesting sub-market is the demand for investments with leases containing rent reviews linked to RPI, with institutions in particular seeking these reviews as a hedge against inflation.
In line with this, Pamela Gray, Partner in charge of CKD Galbraith’s Commercial Asset Management division says that it will largely be down to the skill of the Asset Manager during 2012 to maintain value and marketability of property assets.
She said: “Looking after the needs of existing tenants has always been our mantra, and in these difficult and highly competitive times, the relationship between landlord and tenant is of paramount importance. There is a growing appreciation that landlords and tenants need to work together, not in conflict, and the best relationships will benefit both parties.”
Landlords are bitterly aware of the impact of void holding costs on their investments. Equally, tenants can find landlords far more receptive, in the current climate, to restructuring their existing leases, making asset management opportunities, for those with the appropriate skills, the most likely area of activity for the year.
However, contrary to popular belief, the balance of power has not shifted wholly to tenants. Covenant strength is fundamental to landlords and their lenders, and in the majority of cases the tenant will be required to give detailed evidence of their worth, or at the very least, offer a reasonable deposit in order to facilitate some of the imaginative deals currently on the table.
Pamela Gray said: “These are interesting times for those of us in the property world. It is the focused players who are able to identify the opportunities, which are likely to be acceptable to both sides.”