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Property: is value emerging in the secondary market?

Property: is value emerging in the secondary market?

As the UK commercial property market becomes increasingly polarised and wealth continues to pile into central London locations, is value now emerging in the secondary market?

Marcus Langlands Pearse, manager of the Henderson UK Property unit trust, says that with few competing buyers and plenty of forced sales, prices are at previously unheard of levels in the secondary market, although he warns the quality of the property has to be examined very carefully.  

Unprecedented yields

‘Prices are very uncertain, it’s hard to predict the price of a sale,’ he says. ‘You are seeing 10%-12% yields and actually if you get a forced sale situation it’s a 15%-20% yield. We are seeing double-digit yields that I haven’t seen before in my professional life.’

He cited a recent office building in central Birmingham that was being sold at a yield of 15% plus with seven years left on the lease, as an example of the bargains to be had in the secondary market.

‘If you look at a building like that and you look at the capital value of some of those buildings, it is impossible to buy a site and put a building up for the money an investor in that kind of property is going to pay,’ he said. ‘When you see how far yields have moved, if you are a long-term property investor and pricing in your capital expenditure, I think there is value emerging in those markets.

‘There are now an increasing amount of players who would have been looking at prime and who are now seriously looking at short to medium-term income where values have been severely discounted.’

Moreover, while money pours into the seemingly bullet-proof prime London locations, Langlands Pearse argues that the sector is dogged by less than optimal occupancy rates. ‘This is exactly why we haven’t been investing hugely in that market. It has been very much an investment market, it’s not an occupancy market,’ he said.

Langlands Pearse has been buying retail space on Edinburgh’s Princes Street – the Scottish equivalent of Oxford Street – and invested in a Midlands Tesco store with 14 years remaining. He has also opted for properties with super-long income streams, buying a hospital in Poole with 27 years remaining on the lease.

He has bought into a car showroom let by Sytner BMW. ‘The rent is indexed there as well so in a way we are proofing the income against inflation,’ he said.

Threadneedle’s UK Property Trust manager, Don Jordison said investors had placed too much emphasis on the death of the high street and struggling retail occupancy rates. ‘We look at the distressed market because property is nothing if not entirely schizophrenic, all the time,’ he argued.

‘On the one hand, we have the highest prices being paid for little bits of London, but at the same time, I can buy property that has never been as cheap as I have seen in my career. I would rather be buying historically cheap prices than going into uncharted territory on historically high prices.’

High street retail undervalued

He added that people had been talking about empty shops for decades, but some areas were still doing well, with sovereign wealth fund Norges recently buying up around half of Sheffield’s Meadowhall shopping centre.

Jason Baggaley, manager of the Standard Life Investments Property Income trust, said he expected property values to continue to fall through the final three months of the year, but longer term he is positive on the outlook for the secondary market and is taking positions in properties with shorter leases.

He has recently bought up a grade-A office in central Glasgow’s West George Street, with low rent of £17 a square foot and a yield of 9.5%.

‘We have let one floor that was empty so we have already seen performance, and the purchase price that was paid was less than the cost it would have been to build it,’ he says.

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