Will 2010 Mark The Return Of The Institutional Investor?

10 March 2010

Although we are in the midst of a steep economic downturn, commercial property prices appear to have stabilized across the UK market leading many to view property once more as a suitable investment asset class. As memories of unprecedented growth recede, yields have settled at a more sustainable level, which is encouraging private investors and funds to invest once more in the commercial property market. In fact, according to recent UK property reports, capital values increased by 8.1% during the past year.

Tempted by the prospect of good returns when measured against asset classes, institutional investors are drifting back to a market that they once dominated. The fact that fund managers are diversifying by investing more widely in commercial property is a vital step forward in terms of stimulating the market whilst redressing the balance between private and institutional investment. In recent years, funds and institutions while not abandoning commercial property investment completely had been squeezed out of the market effectively by private investors who were capitalizing on the low cost of debt finance. This was certainly evident within our local market resulting in a number of funds either selling out or unable to purchase as yields were driven to record lows by other private local investors.

The shift in unrealistic attitudes towards property as a short-term investment proposition to regarding it as a longer-term, solid investment vehicle is more closely aligned with the objectives of organisations that have the ability to buy with cash as opposed to leaving it in the bank. Locally, we are seeing signs of the cash-rich private investor coming back into the market for much the same reason. Obviously, the issue of funding continues to be a challenge for both existing and prospective investors, particularly on the local front. In general, banks north and south of the border are reluctant to lend freely into commercial property requiring higher levels of equity before making finance available.

Government measures such as quantitative easing and the reduction of VAT from 17.5% to 15% for the duration of 2009, in my view, helped to stabilise the market with some regions faring slightly better than others. For instance, Northern Ireland still has to deal with the fact that residential values, which declined dramatically last year, continue to have a wider impact within our local economy especially in relation to speculative property development, which has all but ceased.

If we are to experience resurgence in commercial property over the next few years, pricing levels must reflect the fundamental change in banking and financing practices, which have altered dramatically. Whether you are a risk-averse or bullish investor, bank finance will inevitably play a crucial role in the majority of property transactions. What must be borne in mind is the intrinsically cyclical nature of the property market, which means that upturns generally succeed downturns. Furthermore, we should not lose sight of the fact that the concept of buying and selling property is embedded within the Northern Irish psyche and that this desire will never abate.

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