Is it time to move back into commercial property?

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.

Recent research by the Royal Institute of Chartered Surveyors (Rics) reveals professionals in 19 of the 25 countries surveyed, including the UK, expect a rise in the number of distressed properties coming to market in the second quarter.

Rics senior economist Oliver Gilmartin said this issue has not gone away despite a recovery in value and describes it as a ‘thunderous cloud’ hanging over the sector.

Fund manager views

Among fund managers, several are expecting a pause in the market over the second half of 2010, before prices and rents strengthen again next year as economic momentum builds.

Alex Watt, managing director of property investment at Standard Life Investments (SLI), notes a 17% total return from the commercial sector since last June, but said recovery has been uneven.

‘It remains the case that the overall income yield of commercial property at 6.8% compares favourably with other asset classes,’ he said.

‘Despite such attractive pricing, we warn of possible headwinds in the second half. In particular, there are risks of upward pressure on government bond yields as a result of the pause in quantitative easing, political uncertainty and increased gilt issuance.’

With economic recovery continuing to gather pace next year, SLI expects the environment for rents and capital values to become more favourable.