It’s time to buy UK commercial property: strategists

Source : Business Times – 28 Nov 2009

Prices rose 1.9% in Oct, the biggest gain since Dec 2005

FIRST, it was corporate bonds; then stocks. Now it’s time to buy commercial real estate in the UK, according to strategists in Edinburgh advising on about £400 billion (S$917 billion) of assets.

Standard Life Investments is telling investors to consider increasing the proportion of money they hold in stores, office buildings and warehouses, said Andrew Milligan, head of global strategy. Today, the commercial property market compares with where stocks were about seven months ago, said Mike Turner at Aberdeen Asset Management Plc.

‘It’s the last major asset class where there is still a higher risk premium than warranted, so we’ve been looking at it,’ Mr Turner said in an interview at his office in the Scottish capital. ‘April is a good expression of the stage we’re at, just off the lows and starting to gain some traction.’

After gains this year in stocks and corporate bonds, Scotland’s biggest fund management firms are honing in on where they reckon money can be made next. UK commercial property prices rose 1.9 per cent in October from the previous month, the biggest gain since December 2005 and the third straight increase after more than two years of declines, according to Investment Property Databank Ltd. Values are still down 42 per cent from the market’s peak in June 2007.

Land Securities Group Plc, Britain’s largest real estate investment trust (Reit) by stockmarket value, said a week ago that the market started to recover earlier than it had expected. ‘Now looks a good time to consider what the strategic weightings for property should be,’ Mr Milligan said at his office in Edinburgh’s Georgian city centre. ‘If we are at the start of a subdued but normal economic recovery, then very clearly property will inexorably become more expensive.’

Aberdeen, whose headquarters are in the oil city of the same name, and Standard Life and Scottish Widows Investment Partnership, both based in Edinburgh, are Scotland’s three largest fund managers.

Standard Life oversaw £137 billion on Sept 30, while Aberdeen had £129 billion on June 30. Scottish Widows runs about £135 billion after taking on money from another part of parent Lloyds Banking Group Plc.

Scottish Widows started adding to UK commercial property investments in September, moving to ‘overweight’ in its mixed-asset funds from ‘underweight’ the previous two years, said Ken Adams, head of global strategy.

‘UK commercial property is cheap, and cheaper than stocks,’ Mr Adams said in an e-mail. ‘Credit is, broadly speaking, close to fair value.’

They all expect stocks to continue to rise in 2010, though not as much. Mr Turner predicted increases of less than 10 per cent for markets next year, while Mr Adams forecast a total return of 10-15 per cent over the next 12 months.

The MSCI World Index is up 26 per cent this year. The index has gained 68 per cent since March 9, when it was close to the lowest level since at least 1995.

Mr Milligan said a key catalyst for the markets next year will be how central banks and governments around the world withdraw measures designed to tackle the financial crisis. For example, the Bank of England bought bonds to increase the amount of money in the market.

‘We certainly see the stock market continuing to improve into 2010 and we should see more evidence that companies are able to generate profits and investor confidence should improve,’ Mr Milligan said. ‘We’re certainly warning clients that there could be more volatility.’

When it comes to commercial property, the strategists are still reticent about the US market because they said prices may have further to fall. In the UK, yields on shopping centres and offices have jumped as prices fell.

‘We’ve put money into UK commercial property funds,’ said Mr Turner. ‘We’re not anticipating any significant capital performance, but just the yield alone.’

Prime malls in Britain yielded 6.85 per cent in October compared with 4.85 per cent two years earlier. For offices in the City of London financial district, yields rose to 6.5 per cent from 4.75 per cent, according to data from property adviser CB Richard Ellis Group Inc.