David Allen, director of investment at Atisreal, warns that the equity market turmoil will impact on the commercial property sector.


Much has been reported on the equity market turmoil of late, and specifically the continuing fall in property returns from the spectacularly high levels of the past three years.

You may ask what lending on a trailer park in Florida has to do with prime property in the Midlands but the drivers over the last few years have been the same.

The low cost and plentiful supply of credit has triggered a burst of acquisition activity, thus driving up the price of all commercial property, regardless of whether it's primary or secondary.

As a result, returns have come from capital rather than rental growth.

As interest rates have increased and the credit crunch has come about, the debt-based buyers have retreated and prices have fallen.

The impact that these lower returns have had means less money being poured into many of the large funds, particularly the retail funds. Consequently, there are fewer buyers and an outward movement of yields is anticipated.

There has been some speculation lately that there is always an over compensation during market slowdowns, and a number of major investment houses have suggested the same, following the recent equity sell-off.

But property and shares should be for the long term.

The secondary property market was over-valued with little gap between prime and secondary investments, with too little product and too much demand, the inevitable overpricing happened. The correction is in progress.

Overall, the sector has seen a marked reduction in the number of transactions putting a great deal of pressure on valuers, especially of unitised funds who are beginning to value based on sentiment and not actual transactions.

This is important as a large number of potential sales are still benchmarked against historic valuations.

So what are the predictions now that the summer break of playing golf, networking and watching the rain is over?

* There will be a re-pricing to reflect the five-year swap rates (thankfully now reducing).

* Funds will be back as both long-term investors and some on a more predatory basis.

* The fundamentals of the property have not altered if they are well let and there is an income yield.

* The impact of increased void rate liabilities will be anticipated in the pricing of property and on the recent IPD indices a ten per cent void level by income on industrial property will lead to a five per cent impact in reduction in income on the assumption that rates are set at roughly 50 per cent of rent.

* Cash buyers will dominate.

* SIPP and private buyers of smaller lot sizes will become important players but will be choosier n Expectations will need to be managed against current pricing and not historic pricing.

Lastly, the alteration of pricing when transactions take a long time will continue to reflect different market conditions.

The irony now is that the equivalent of trailer parks in the US are being purchased by British institutions looking for income return from caravan sites.