Investment Line: Is it too late to ride the commercial property recovery?

Commercial real estate is showing signs of emerging from a two year slump, but are the uplifts in the Net Asset Values (NAV) a buy signal for the closed-ended property sector?

UK commercial property capital values rose over the third quarter of 2009 by 1.5%, a 5.6% improvement on the previous quarter according to statistics from the IPD UK Quarterly Property Index, and the signs are that the majority of UK property porfolios saw even bigger gains through the last quarter of the year.

Last week, the Ignis –run UK Commercial Property (Ordinary Share)  trust–the largest listed closed ended UK property fund-reported a 10% rise in its property portfolio for the three months to the end of the year. Broker Oriel estimated the Net Asset Value would rise to around 74p from 67.7p at the end of September.  

Standard Life Property Income (Ordinary Share) saw its property portfolio rise in value by around 5% for the same period while F&C Commercial Property (Ordinary Share) also posted a 10% rise in gross portfolio assets.

Are there uplifts sustainable or have investors missed the best of the recovery and the ensuing share price appreciation that has gone with it?

Winterfloods analyst James Brown says he expects to see further rises in Net Asset Values in the sector during the first quarter of 2010 but that further out, the scenario is less likely as economic uncertainties cast a shadow over the UK market.

There are two main reasons why NAVs have bounced over the last quarter according to Brown.

The first has been the huge inflows into open ended property funds over the last few months, which has driven fund managers to acquire commercial property.

The second has been the search by income investors for meaningful yields.

‘This has kicked off transactions and pushed up prices,’ says Brown.