The commercial property sector started to tank some way ahead of the stock market – the cracks were already showing in 2007. Values fell by 35-40%, and property stocks fell even faster, with many REITs 80% down on their peak values [1] .
Values had risen fast in the years up to 2007 as speculative money entered the market. At the same time, developers were pushing new properties up as fast as they could, so that a huge amount of new space became available just as the economy began to slide.
Many REITs were left with high levels of debt, and rental income no longer growing. A series of rescue rights issues followed, in early 2009. Perhaps that was the start of the rebound; few of the companies involved had much difficulty raising funds from the City.
Since the low point earlier this year, most property stocks have rebounded, some by more than 50%. So, is is too late to get back into property – have investors who still have no weighting in the sector missed the boat?
Perhaps not. The benchmark IPD index for UK property shows it yielding 8% - more than double the yield on gilts, and several times more than even the best savings accounts [2] . (There's a good table showing spreads between property and gilt yields in the Hammerson Plc half year results [3] .) Some property companies are aiming to purchase properties at considerably larger yields – Hansteen Hldgs UK Industrial Property Unit Trust is aiming to get 12 to 15% annual returns [4] and it seems unlikely the company is betting on much return from price appreciation in the short term.
The series of rescue rights issues earlier this year removed much of the corporate risk from the sector. And occupancy levels, except in retail, appear to have held up reasonably well. Much of the collapse in value was driven by yields increasing dramatically, while declines in rentals have generally been minimal. At Workspace Group Plc, for instance, the rent roll fell only 3.5% for the year to June 2009 [5] .
Rental values are still falling, however. That appears to be well discounted; some observers believe the market is already pricing in a further 20% fall in primary office rents. This will impact…
