Opportunity Knocks For Bumpy 2013

4 February 2013

Richard Higgins, Pamela Gray and Ian Forbes of CKD Galbraith make their predictions for the commercial property investment market in 2013.

Richard Higgins, Pamela Gray and Ian Forbes of CKD Galbraith make their predictions for the commercial property investment market in 2013.

As predicted, 2012 was a testing year. The economy continued to stall, there was a persistent polarization between prime and everything else and a continued lack of debt funding, but with the re-emergence of private equity looking for greater returns. All in all pricing – with the exception of prime – moved out.

In 2013 there will be more of the same.

Richard Higgins, Commercial Investment Partner at CKD Galbraith, said: “The retail sector, in particular, will continue to struggle in 2013, and, while everything will be set against the backdrop of new uncertainty caused by the Scottish independence debate, it will also be a year of opportunities for those willing to take some risk as pricing moves to realistic levels. Getting the right advice is paramount.”

Emerging opportunities
Although investment into the commercial property market is likely to remain weak in the short-term, with investors wary of continued uncertainty in the occupational market, the first signs of a turning point are now being seen, which could provide opportunities and value.

Richard Higgins continued: “Property companies and opportunity funds are back in the market. But they’re very selective, and still constrained by availability of debt, particularly as many of the previously active banks are not currently in the market.

“However, there is an opportunity to invest in the market during a period when it is anticipated that properties can be acquired at levels which allow for significant growth into the next economic cycle.”

Occupier Demand  
Pamela Gray, Partner in charge of CKD Galbraith’s Commercial Asset Management division, said: “Whilst the commercial property market is likely to remain weak, as a firm we have seen an uptake in occupier activity generally, across the sectors, in the fourth quarter of 2012 and, so far, in 2013. Whilst some of this activity is simply occupiers flushing out terms for use in negotiations with existing landlords, we have seen an increase in the number of relocations or expansion deals.

“Tenants see opportunities in the current climate to secure better quality accommodation on attractive terms and this has resulted in a rise in the number of lettings.

“As the supply of good stock continues to decline, there is going to be more pressure on the major occupiers over the next 12 months and beyond. This lack of development has started to restrict options for occupiers, particularly in the office and industrial sectors, and there are currently a number of key occupier requirements in the market, which will be difficult to satisfy.

“In the retail sector we have seen a number of high profile business failures, but equally there are other national operators such as Subway, B&M, Aldi and Iceland who have significant requirement lists and are actively looking to open new stores in 2013.”

With the exception of Aberdeen, and some landmark streets in Glasgow and Edinburgh, headline rental levels have either fallen back or remained static since the peak of the market in 2007, but the first signs of a turning point in the occupational market are now being seen. This, in conjunction with a UK-wide lack of development, is likely to see rents begin to grow in the medium term.

In addition, improved business confidence supported by continued global economic recovery is expected to generate employment growth in the UK, initiating requirements for additional space from occupiers.

Market Polarisation
Since the downturn, the UK investment market has been characterised by polarisation between investments with long-term secure income streams and those let on short to medium term leases.

Since the second half of 2008, the gulf between prime investments, and the secondary and tertiary markets has continued to increase.

The definition of prime has also contracted, with many assets, which would previously have been classified as prime, now being discounted due to less than perfect attributes.

Ian Forbes, Investment Agency Associate at CKD Galbraith, said: “Prime properties are now defined as those which are not over-rented, let on long leases to an excellent covenant tenant, superbly located, and best in-class specification.

“The recurring theme in all sectors is that of risk pricing, and the polarisation between perceived low risk and everything else.”

Secondary Opportunities
With prime investments unlikely to offer value to investors seeking a return in excess of 5%, many investors see the secondary market, which now includes investments formally labeled prime (now good secondary), offering good opportunities.

Ian Forbes added: “There is still a mismatch between buyer and seller price expectations over secondary stock but realism is emerging.

“Secondary yields are expected to continue to drift out in the short term, but could quickly swing back when sentiment improves. Only prime assets with long income can be expected to remain stable but are unlikely to be attractive to investors seeking above average returns.”

Debt Finance
The availability of debt financing continues to pose a serious issue for commercial property
investors.

Lenders are pricing the risk aggressively, and margins are considerably higher than have been seen historically, resulting in a relatively high overall cost of finance, particularly for anything that is less than prime.

This lack of finance has increasingly put pressure on asset pricing, with investors often unable to source the debt required, or at such high cost that values are deflated further.

Richard Higgins commented: “As always in these secondary markets, “cash is king”, and vendors not using leverage, or only requiring minimal debt, are put in increasingly strong negotiating positions.”

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