Is it time to move back into commercial property?

From an apparent safe haven a few years ago, commercial property has subsequently become a divisive asset class in investment circles.

A 45% peak to trough decline in value from 2007 to 2009 has encouraged a split in opinions and many investors are now considering the state of this market after a decent rally.

Commercial property funds enjoyed a return to popularity last year, heading the best sellers in the fourth quarter. But with values rising just 0.8% in April according to the Investment Property Databank (IPD) – the slowest since the rebound began last August – many are asking whether now is the best time to buy.

Commercial property bulls...

Most commentators still see a case for the asset class, highlighting solid yields – with the premium over cash and government bonds above the 15-year average – rather than the capital gains story of last decade’s bubble.

Among those at the most bullish end of the scale is Peter Lucas, strategist at RBC Wealth Management, who describes commercial property as one of the UK’s most attractive investments.

‘Unlike corporate bonds or equity, there is still value to be had in commercial property,’ he said.

‘It also pays a handsome yield, particularly relative to cash, which might come in handy if the authorities are forced to inflate their way out of their debt problems.’

...and bears

Perhaps the most bearish case for this sector comes from De Montfort University’s annual bank lending report, which reveals a fifth of loans secured on UK commercial property assets are in default or have breached lending covenants.

Despite the recent bounce in values, this survey shows £22 billion of property loans defaulted last year – a 600% rise on 2008 – and a further £28.3 billion has breached loan-to-value covenants.

Meanwhile, another bearish factor – apart from general economic malaise – is ongoing increases in distressed sales.