In the last 12 months we have seen a distinct change in confidence in the UK commercial property market, assisted by the onset of the global credit crunch, increasing household costs and record oil levels.

However, the bad press and readjustment in the commercial property market has to be put into perspective and considered in a cyclical and historical context. According to the Investment Property Forum, over the last 3, 5 and 10 year periods, direct investment commercial property has outperformed equity gilts and cash deposits.

Taking a step back, even over the longest period for which reliable data is available (32 years), commercial property has produced annualised returns of 12.1% ahead of both gilts and cash deposits. Furthermore, since 2004 UK commercial property has achieved total returns of approaching 20%. Increased negative sentiment of the market, and the effect this has had on investor confidence, means that property owners now have to be realistic and realise their investment may not be worth what it once was. They also need to consider that if they are a debt reliant investor, they may not be able to refinance to add to their portfolio. Furthermore, certain investors may have agreed funding which expects rental growth or lease restructuring at certain points, after which time their interest rates may increase. With the dangers in the credit market this may make refinancing investments more difficult for some people. In addition, the loan to value ratios have now increased with many investors having to increase their own debt in to purchase and accept that banks are now lending typically up to only 75% of the purchase price. Coinciding with a reduction in capital values this means that some investments may now be marginal.

The reduction in property values has occurred across most property classes and is now considered by many to be at a more realistic and sustainable levels than of recent years. Typically secondary retail, office and industrial has moved at approximately 1-1.5 basis points in the region of 6.75 to 8.25%. The tertiary market is now more realistically valued at at least 8.5% plus, reflecting the additional risk and limited occupational and investor appetite. The prime retail market, however, appears to be holding its own with sale and leaseback deals to national retailers, including high street banks, achieving record levels specifically in sub £750,000 lot sizes. This suggests that private investors still see commercial property as a safe bet and more competitive than bank deposit account rates. Recent transactions in the north east confirming this include Imperial Cancer Research Fund retail unit in Alnwick let until 2012 reflecting a net initial yield of 4.5%, Boots Pharmacy in Coatsworth Road, Gateshead reflecting a net initial yield of 5.13% on a lease expiring in 2022 and new Barclays Bank in Jesmond on a new 20 year lease at a net initial yield of 4.84%.

The market, however, has prepared itself for a reduction in values. Over the past two or three years many investors have built cash reserves and have been waiting for the market to slow down. These investors are waiting for a price correction to acquire properties which they feel they can hold, manage and then trade on in a stronger market. This strategy will possibly reap awards for many who have built up good relationships with their funders, and also have larger portfolios with lower gearing and debt. The banks are still lending albeit offering higher margins on the loans and more realistic loan to value ratios that should be a safeguard for the market in the future.

Whilst the property market may be more difficult we think that the market does present opportunities for experienced investors, and that gollowing the price correction and rebasing of values the market will gain confidence over the next year.

Naylors has transacted approximately £50M worth of property in the last 12 months and have advised clients both locally and nationally on a number of acquisitions and disposals.