The UK commercial property market showed signs that it may have reached bottom on the back of rising demand, according to new research.
Lambert Smith Hampton’s UKIT Quarterly Bulletin found that activity in the commercial property investment market improved last quarter with demand for property increasing, and the market indicator – yields – rising by their smallest amount since the start of the recession.
Ed Jones, head of investment at LSH’s Birmingham office, said: “There has been an appetite for investors to acquire for quite a while now but the simple factors holding back activity are the scarce supply of good quality stock and ‘expensive’ debt.
“The problem doesn’t go away for cash buyers either who are competing amongst one another for properties that offer long term security on what can be perceived to be at a substantial discount. This part of the market is now seeing yields harden simply as investor demand increases.
“Stricter repayment terms on property loans has pushed yields out considerably on investments with leases that have under ten years unexpired, but the cash buyer with an eye for location, good covenant and quality are rightly buying into these discounts now; sure enough the rest will probably follow before too long.
LSH’s head of capital markets, Ezra Nahome, added: “There has been a change in sentiment and a renewed interest in investing in commercial property. There is a greater urgency to get deals done. The improvement in market activity may have been modest but the mood has definitely changed and investors are keen to buy well secured quality property at current values.”
The past quarter’s yield increase was just three basis points, compared to 97 basis points in the first quarter of 2009. It is the smallest increase for two years. The recession saw yields increase to such an extent that UK commercial property values are now 45 per cent below their peak in mid 2007. The commercial property investment market was the first and hardest hit by the recession.
Many property professionals believe that it will be the first to improve and lead the market out of the downturn with the commercial property occupier market lagging behind and still yet to fill some of the pain already experienced by the investment market.
Ezra added: “While investment demand has increased, UK property is not out of the woods yet.
“While economists are suggesting that there is a light at the end of the tunnel and we may be moving out of the recession by the end of this year at the earliest, the commercial property occupier market has weakened significantly in recent months and this may dent investor confidence in this fragile market.”