Fund managers note the end of capital appreciation
Investors should take note - fund managers are beginning to turn their backs on the commercial property sector.
F&C's Commercial Property Trust, a leading European investment house with €156 billion under management, have forecast an end to the rocketing capital appreciation that has pushed up returns in this asset class, while the Westbury Property Fund has said that it will begin investing in companies backed by a property asset rather than investing directly in commercial property. Other large commercial property investors are ditching their interests.
Investors' money has continued to flood into the sector but although that has pushed up prices, it has simultaneously pushed down yields as rents have failed to rise in line with prices. Many landlords are saying that the rent on their properties may not even cover the interest payments on the capital used to buy the buildings.
Other signs confirm the story: to the end of June 2006, the yield from F&C's Commercial Property Trust had dropped from 6.47% to 5.63%.
The Bank of England's latest Financial Stability review points out that the 15% rise in commercial property prices to May 2006 was higher than current rents and interest rates could justify. That current returns are unsustainable is widely recognized, but the impact and severity of the slowdown could still take some investors by surprise because with yields falling investors are depending on capital appreciation to deliver their much needed returns.
As the gap between high capital values and rents scares off many high profile investors, so expect others to follow their lead. Despite the UK market being seen as still quite hot, as price rises slow money invested into the UK will go elsewhere.
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