In spite of long term outperformance, does UK commercial property remain an attractive asset class in light of long term low interest rates and Brexit?
In the aftermath of the Brexit vote, there was a sharp gyration in the UK commercial property market. This caused a dip in investor sentiment towards the asset class and led to redemptions in the open-end UK property fund space. Since mid-July, the market has held up better than many expected at the time. We are aware of properties that have been sold for less than their market value and also properties which have sold at a premium to pre Brexit valuations in some instances. It would appear that the market quickly returned to more efficient pricing and as a result we have seen most of the open-end funds that suspended trading move towards a position of regular activity investment and redemptions.
With government bond yields near historic lows, commercial property offers a substantial yield premium for investors. The attractions of the asset class are most evident in this premium and in the strong historical returns that have been delivered with little correlation to equity markets. The nature of commercial property lease-structures means that the asset class is able to offer a reliable future income stream, especially where long-lease terms are in place.
UK commercial property is favourably placed to benefit from both the search for income and the depth of overseas demand for assets. The investor base of the asset class consists of a large pool of well-capitalised international investors; these investors have seen a strong benefit from the recent currency volatility and hence there should be a price floor despite post-Brexit uncertainty. With that said, there is certainly a degree of caution applied to the outlook for central-London assets as the impacts of Brexit are yet to materialise. For this reason, the outlook for the asset class is regionally different and within commercial property, the outlook for office blocks relative to industrial units is also quite diverse.
It is worth noting that lending to the sector has been constrained over the last few years, development activity has also been modest relative to history with vacancy rates below average in many market segments. With the Brexit negotiations still to come, it is likely that businesses in the UK will continue to delay investment decisions. As a result, the outlook for the asset class remains somewhat uncertain and our preference remains for specialist real estate investments. These tend to be those with visible cash-flows, derived from a portfolio of long lease assets where balance sheets are not overly levered.
This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. Past performance is not an indication of future performanc and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basiis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.
LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority (FCA).