A good time to buy commercial property?
Many in the property world are calling the bottom of the property investment market following around 18 months of falling values, reports Philip Woolner of Cheffins. He says that cash-rich property investors are now actively seeking to re-enter the market, and we have noted a sharp increase in investment requirements in the second half of 2009. Most of these investors are, however, chasing prime property investments: property let to strong covenants for leases of 10 years or more. This product is in short supply and, as a result, prime yields have fallen back to 5 and 6%.
This market improvement has not really filtered down into the secondary market for a number of reasons. Firstly, there are real concerns over the state of the occupier market. He says some falls in rental values have been seen across all sectors, and there could well be further falls as the impact of the recession bites harder on businesses. Landlords are more pessimistic over the cost of holding vacant property, predicting longer void periods and reduced rents, together with costs associated with repairing, insuring and securing the property whilst it is empty. The other major cost which landlords are now having to face is the payment of business rates at the full rate following an initial 3 or 6 month rate holiday. Holding vacant property has become an expensive business.
As a result, vacant possession values have fallen well below investment values. Small private buyers are picking up some reasonable secondary income-producing investments (where they can be found) but short term lets are being valued at closer to vacant possession levels.
Philip states that Cheffins have reported on a number of properties recently which have either fallen vacant or are reaching a lease end, where values have been as much as 50% below those reported (or at least hoped for) two years ago at the height of the market. This leaves many landlords with difficult decisions to make: to sell now (take the money and run) or to spend some money on the property and try to re-let it at prevailing rental levels (sticking it out). The decision can be very different and depends on the nature of the property and on the circumstances of the individual landlord. Good advice is required from agents who know the market and have been around long enough to have seen it all before. This is the sort of market where property agents really earn their fees!
He confirms that there are signs of improvement in the market but it will undoubtedly be many years before we see the heights of 2007 once again.
