Friday, December 12, 2008

Down the U-bend

Buy on the 'U' to profit from commercial property

"Another interesting income opportunity is emerging – in commercial property. There are at least three reasons why 2009 could lay the foundations for a decent commercial property revival. The first is the 7.5pc yield. The second is timing – entering the market while prices are still falling is the favoured approach of seasoned investors because that is when the best properties become available. The third is the way in which the collapse in sterling has made UK commercial real estate a bargain for buyers with dollars, euros or yen. In each of these currencies UK property has fallen by 50pc since June 2007." – That all sounds nice, but where is the money going to come from?!?

Posted by drewster @ 01:19 AM (818 views)
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6 thoughts on “Down the U-bend

  • Although the article is about commercial property, a similar (flawed) logic is often voiced about residential.

    Let’s look at Japan post-bubble. In Japan in the 1990s, money saved in the bank earned 0%. Money spent on property would earn a yield of, let’s guess, 3%. However if the value of the property is falling by 5% a year then your total yield is -2%. Capital preservation is currently seen as more important than yield.

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  • A unrelated point is that the yields quoted in the article are historical. Much as you wouldn’t drive a car by looking out the back window, you wouldn’t buy assets (property or shares) while looking at past earnings. Future earnings for commercial property look bleak – Woolies closing means 800 vacant shops on high streets across Britain, more competition for fewer tenants, and plummeting rents. Commercial property isn’t a bargain yet!

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  • “entering the market while prices are still falling is the favoured approach of seasoned investors because that is when the best properties become available” – catching a falling knife is the way to lose money

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  • I think commercial property is way over valued.

    Particularly when you can open a shop on line and sell to the world as opposed to local passers by.

    Add to that the fact that alot of people utilizing the internet can now work from home.

    If anything can fall by 70-80% it’s commercial property.

    But as the article points out, it’s already 50% less for foreign investors. Investors who incidentally seem to own most of our water and power companies.

    We will be owned out right by Jonny Foreigner soon

    Thanks Gordon.

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  • @str 2007 – I tend to agree with your observation that commercial property (generally) is somewhat overvalued. Many of my colleagues ploughed significant sums of client money into Insurance co property funds – values are down significantly and effectively they are locked in because of the pricing arrangement now applied to the funds – the yield might look attractive but people must remember property is a very illiquid asset class. As for the “U to profit” its more likely to be an L (IMO) – it will take 5 years or more for commercial property funds to recover.

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  • crash bandicoot says:

    str 2007, maybe Gordon is planning to do a Chavez. Draw in the foreign investors then nationalise all of their assets and kick them out – that sounds like a cunning plan.

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