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Commercial Property Near The Bottom?

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Has commercial property hit the bottom?

LONDON (Reuters) - Real estate company Land Securities is preparing for a homecoming to the battered commercial property investment market, fuelling hopes a two-year correction in prices is now in its twilight.

After months in the investment wilderness, the country's largest real estate investment trust, said on Wednesday it was preparing to join a growing legion of opportunistic buyers keen to exploit a sharp 45 percent fall in values since June 2007.

"With a strengthened balance sheet we are now assessing opportunities for new investment," Chief Executive Francis Salway said.

"We maintain our view that patience is a virtue and that opportunities will arise over years not just months, particularly in terms of disposals by banks," he said.

By 10:57 a.m. British time, Land Securities' shares were trading 3.3 percent up at 454.75 pence, ahead of a 2.1 percent rise in the FTSE 350 Real Estate Index. KBC Peel Hunt upgraded the shares to a Buy rating with a 490 pence target price.

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Has commercial property hit the bottom?

LONDON (Reuters) - Real estate company Land Securities is preparing for a homecoming to the battered commercial property investment market, fuelling hopes a two-year correction in prices is now in its twilight.

After months in the investment wilderness, the country's largest real estate investment trust, said on Wednesday it was preparing to join a growing legion of opportunistic buyers keen to exploit a sharp 45 percent fall in values since June 2007.

"With a strengthened balance sheet we are now assessing opportunities for new investment," Chief Executive Francis Salway said.

"We maintain our view that patience is a virtue and that opportunities will arise over years not just months, particularly in terms of disposals by banks," he said.

By 10:57 a.m. British time, Land Securities' shares were trading 3.3 percent up at 454.75 pence, ahead of a 2.1 percent rise in the FTSE 350 Real Estate Index. KBC Peel Hunt upgraded the shares to a Buy rating with a 490 pence target price.

Interesting thread :unsure:

I've always thought commercial property was a good investment where interest rates were below property yields ;)

This would point to a buy signal now :unsure:

However I have concern about rents coming down in the short term, particularly on retail and offices :o

Therefore I think its still too early, maybe closer to the end of this year? :huh:

Anybody got any better ideas?

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Interesting thread :unsure:

I've always thought commercial property was a good investment where interest rates were below property yields ;)

This would point to a buy signal now :unsure:

However I have concern about rents coming down in the short term, particularly on retail and offices :o

Therefore I think its still too early, maybe closer to the end of this year? :huh:

Anybody got any better ideas?

The rule of thumb is to buy at 15% yield and sell at a 5% yield.

Commercial is more "honest" than residential as prices are down around 50% for the former rather than around 25% for the latter.

My guess is that it is still too early to buy commercial here.

As you point out, rents are dropping and voids are rising which probably flatters yields a bit compared to where they will be at to-day's price and to-morrow's income.

I suspect that time is on your side in the UK.

If you are serious about commercial property, the US is a better place to look. There are more deals with yields closer to 15% there than here.

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Have you walked around london ( The City ), the Westend or any other large town. The amount of To Let signs / boards are very surprising. I dont see the bottom being in.

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commercial property i would expect to be far worse than domestic.

its not needs based, but opportunity based and needs a working economy to function.

the grey office call centre blocks will be the longbridge plants of tomorrow.

staffed by one min wage guard.

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Interesting thread :unsure:

I've always thought commercial property was a good investment where interest rates were below property yields ;)

This would point to a buy signal now :unsure:

However I have concern about rents coming down in the short term, particularly on retail and offices :o

Therefore I think its still too early, maybe closer to the end of this year? :huh:

Anybody got any better ideas?

It looks like you have already invested heavily in pointless smileys and emoticons! ;)

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The rule of thumb is to buy at 15% yield and sell at a 5% yield.

Commercial is more "honest" than residential as prices are down around 50% for the former rather than around 25% for the latter.

My guess is that it is still too early to buy commercial here.

As you point out, rents are dropping and voids are rising which probably flatters yields a bit compared to where they will be at to-day's price and to-morrow's income.

I suspect that time is on your side in the UK.

If you are serious about commercial property, the US is a better place to look. There are more deals with yields closer to 15% there than here.

yep i agree not yet

and i dont see asking prices down 45% yet - most are still n denial especially given the likelihood of the recession/depression being far from over

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The rule of thumb is to buy at 15% yield and sell at a 5% yield.

Commercial is more "honest" than residential as prices are down around 50% for the former rather than around 25% for the latter.

My guess is that it is still too early to buy commercial here.

As you point out, rents are dropping and voids are rising which probably flatters yields a bit compared to where they will be at to-day's price and to-morrow's income.

I suspect that time is on your side in the UK.

If you are serious about commercial property, the US is a better place to look. There are more deals with yields closer to 15% there than here.

Agree to some extent, but can you ever see a 15% yield with 0.5% base rate?

I would be happy enough to buy at 9% and sell at 7%

The leverage used by most of the commerical property companies/funds would ensure me a good profit in that event

Also, as someone wisely pointed out already, equities rise in anticipation of events that have not yet happend in the actual property market

(after a request I am going cold turkey on the emoticons, even though I love them :( )

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IPD stats show value declines for 24 consecutive months

15/07/2009 09:00

Investment Property Databank (IPD) figures show the value of commercial property has dropped for 24 consecutive months.

Values in June fell 0.9%. This takes total peak-to-trough falls to 44.1%. Landlords’ rental income had fallen because of an increase in vacancy rates, IPD said. Capital values fell 0.7% in June, industrial space fell 0.8% and offices, 1.2%. Values in the last year are down 30.8% overall.

The figures come as Land Securities prepares to update the market this morning. The City will be keen to hear chief executive Francis Salway’s thoughts on the market outlook.

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Commercial property is starting to bottom - yields now over 10% in many places. Next 12-24 months will be a good time to buy into Reits for the longer term.

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Real estate company Land Securities

Say no more.

Nothing to see

... except empty shops

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Commercial property is starting to bottom - yields now over 10% in many places.

I think CP is a good guide as to where HPC will go. The market doesn't have the emotional attachements of residential and as such the bubble has corrected much more quickly.

What I find interesting is that it is bottoming out at yields of approx 10%. This 10% yield (I guess) is on a long term full repairing lease; what sort of yield should resi bottom out at given that it's let on short term non-repairing leases?

Edit:

To answer my own question (with a few rough guesses at least).

I think a safe working assumption for BTL/resi is that the net yield should be approx 2/3 of the gross.

I'm guessing here but CP's net yield is probably 4/5 of the gross (assuming for the sake of argument 6 months void + 6 months agents fees on a typical 5 year lease but no other costs) i.e. about 8% at the moment.

So the gross yield on resi might bottom out at 8% x 3/2 = 12%

Edited by Young Goat

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Commercial property is starting to bottom - yields now over 10% in many places. Next 12-24 months will be a good time to buy into Reits for the longer term.
no it's not.on what basis are you claiming the bottom being in.voids?credit market easing?

Not my claim although I've heard it elsewhere.

Are you saying that CP yields are higher or lower than 10% or that they will bottom out at another point?

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what I'm saying is that noone's got any idea how bad it's going to be yet.we definitely haven't seen the bottom in voids(which will undoubtedly get worse with rising unemployment and decreased govt spending) ergo we're probably not near a bottom in rents as voids rise.

Many towns in the midlands and North are facing high streets with 1 in 8 shops plus empty.This will no doubt worsen as leases come up for renewal and tenants get the chance to walk for free.

and this is before punch taverns and enterprise inns go under and the administrators start dumping their portfolios.

just because it's cheap doesn't mean it won't get cheaper.

I agree with you there

Hence a bit of caution and wait & see

REIT prices were definately ahead of themsleves in April & May - difficult to tell now

But they are worth monitoring for further falls

A decent discount to net assets could give a good margin for error on asset values in the balance sheets

Goat has a point that a 10% yield on a rentable building is a good deal, but not for a secondary shopping centre

I think the Rothschilds said something like buy on the sound of guns?

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what I'm saying is that noone's got any idea how bad it's going to be yet.we definitely haven't seen the bottom in voids(which will undoubtedly get worse with rising unemployment and decreased govt spending) ergo we're probably not near a bottom in rents as voids rise.

Many towns in the midlands and North are facing high streets with 1 in 8 shops plus empty.This will no doubt worsen as leases come up for renewal and tenants get the chance to walk for free.

and this is before punch taverns and enterprise inns go under and the administrators start dumping their portfolios.

just because it's cheap doesn't mean it won't get cheaper.

Commercial isn't just about retail but also includes office space and industrial units. Also retail property's difficulties aren't necessarily new or linked to the recent bursting of the bubble.

Let's assume for the moment that commercial really is bottoming out at a 10% yield and look at the implications for HPC. Are we agreed that the implication is a bottom in prices with yields at about 12% - in my reckoning that's about a 60% peak to trough fall.

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Commercial isn't just about retail but also includes office space and industrial units. Also retail property's difficulties aren't necessarily new or linked to the recent bursting of the bubble.

Let's assume for the moment that commercial really is bottoming out at a 10% yield and look at the implications for HPC. Are we agreed that the implication is a bottom in prices with yields at about 12% - in my reckoning that's about a 60% peak to trough fall.

Goat, I would love that to be the case and its a good point

Way back in the mid-90s residential property did yield 12% I recall

I just regard retail as being particularly difficult in 2007 and 2008 around 10% was added to retail space in the UK through a lot of new shopping centres opening

Many of these new centres were developed by Land Secs, Hammerson, Brit Land and Liberty sadly

My personal view on HPC is along the lines of S&P (35-40% in total) followed by a long period of moving sideways in sticker prices (is that nominal terms?) - a long enough "sideways" period gets to your fall with inflation (real terms?)

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I think CP is a good guide as to where HPC will go. The market doesn't have the emotional attachements of residential and as such the bubble has corrected much more quickly.

What I find interesting is that it is bottoming out at yields of approx 10%. This 10% yield (I guess) is on a long term full repairing lease; what sort of yield should resi bottom out at given that it's let on short term non-repairing leases?

Edit:

To answer my own question (with a few rough guesses at least).

I think a safe working assumption for BTL/resi is that the net yield should be approx 2/3 of the gross.

I'm guessing here but CP's net yield is probably 4/5 of the gross (assuming for the sake of argument 6 months void + 6 months agents fees on a typical 5 year lease but no other costs) i.e. about 8% at the moment.

So the gross yield on resi might bottom out at 8% x 3/2 = 12%

THe CP market is different to residential IMO. If you lose your job, you still need a place to live. If you have to sell one house you will still have to rent another, even if housing benefit pays for it. If your employer goes bust the premises from which it operated will be empty. Less commerce means less need for commercial property. THe commercial market is always liable to greater downswings as a result.

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ok,there's loads of empty office space too they're asking 20k per annum for and to be frankly honest,they wouldn't get a tenant if they offered it for rent free/pay the rates .

industrial.............do I have to go on.you're really not getting it are you?

Fine, tell me where you think it's going then; will it bottom out at 12%, 15% 20%.

Should we be assuming a that 10% gross equates to 7% net, 5% or 3%?

Please give me your figures than a rather than a plain "that's not right".

Personally I think a 60% HPC is more than bearish enough but where do you stand?

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THe CP market is different to residential IMO. If you lose your job, you still need a place to live. If you have to sell one house you will still have to rent another, even if housing benefit pays for it. If your employer goes bust the premises from which it operated will be empty. Less commerce means less need for commercial property. THe commercial market is always liable to greater downswings as a result.

Thats a good point that intuitively I agree with

However a lot of residential property is vacant at any one time and former house/flat renters can always downsize to a houseshare/lodgings/relatives? :unsure:

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Fine, tell me where you think it's going then; will it bottom out at 12%, 15% 20%.

Should we be assuming a that 10% gross equates to 7% net, 5% or 3%?

Please give me your figures than a rather than a plain "that's not right".

Personally I think a 60% HPC is more than bearish enough but where do you stand?

Goat

Don't bother he's not worth it... ;)

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THe CP market is different to residential IMO. If you lose your job, you still need a place to live. If you have to sell one house you will still have to rent another, even if housing benefit pays for it. If your employer goes bust the premises from which it operated will be empty. Less commerce means less need for commercial property. THe commercial market is always liable to greater downswings as a result.

Of course the markets are different but at the end of the day they represent transfers of cash from landlord to tennant, albeit with different costs, timings and amounts.

What I'm trying to do is look at the similarities and adjust for the differences. If commercial in general yields 10% (say) then should we expect resi to yield 5%, 15% or any figure inbetween and more to the point why.

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Thats a good point that intuitively I agree with

However a lot of residential property is vacant at any one time and former house/flat renters can always downsize to a houseshare/lodgings/relatives? :unsure:

Valid and that would shrink the differential between commercial and residential occupancies / rentals.

With regard to residential, the market is more driven by sentiment, which changes more slowly, as owner / occupiers are not making purely rational commercial decisions. This is evidenced on this site by STRs jumping in even though they expect further falls. THey are motivated by security, the other half, kids, schools, being able to decorate and many other factors that do not impact on the commercial market.

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Of course the markets are different but at the end of the day they represent transfers of cash from landlord to tennant, albeit with different costs, timings and amounts.

What I'm trying to do is look at the similarities and adjust for the differences. If commercial in general yields 10% (say) then should we expect resi to yield 5%, 15% or any figure inbetween and more to the point why.

Casting my mind back resi was always supposed to yield more (much like secondary industrial, but worse) as the tenants were a worse credit risk and the lot sizes were fiddly and small

I would venture to put forward for debate:

Senior property debt = 10 year gilt +2% (for prime property)

Prime property yield = senior property debt +1-2%

Secondary property yield = prime property yield + 2%

Tertiary property yield (including residential) = secondary property yield + 2%

So (I think) where bank are lending on prime property its 5.75% its somewhere between 11% and 12%

It would be nice if this is where we ended up ;)

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