it’s time to buy commercial property

It’s Time to Buy Commercial Property, Edinburgh Strategists Say Share Business ExchangeTwitterFacebook| Email | Print | A A A
By Rodney Jefferson

Nov. 25 (Bloomberg) -- First it was corporate bonds, then stocks. Now it’s time to buy commercial real estate in the U.K., according to strategists in Edinburgh advising on about 400 billion pounds ($663 billion) of assets.

Standard Life Investments is telling investors to consider increasing the proportion of money they hold in stores, office buildings and warehouses, said Andrew Milligan, head of global strategy. Today, the commercial property market compares with where stocks were about seven months ago, said Mike Turner at Aberdeen Asset Management Plc.

“It’s the last major asset class where there is still a higher risk premium than warranted, so we’ve been looking at it,” Turner said in an interview at his office in the Scottish capital. “April is a good expression of the stage we’re at, just off the lows and starting to gain some traction.”

After gains this year in stocks and corporate bonds, Scotland’s biggest fund management firms are honing in on where they reckon money can be made next.

U.K. commercial property prices rose 1.9 percent in October from the previous month, the biggest gain since December 2005 and the third straight increase after more than two years of declines, according to Investment Property Databank Ltd. Values are still down 42 percent from the market’s peak in June 2007.

Land Securities Group Plc, Britain’s largest real estate investment trust by stock-market value, said a week ago that the market started to recover earlier than it had expected.

Right Time

“Now looks a good time to consider what the strategic weightings for property should be,” Milligan said at his office in Edinburgh’s Georgian city center. “If we are at the start of a subdued but normal economic recovery, then very clearly property will inexorably become more expensive.”

Aberdeen, whose headquarters are in the oil city of the same name, and Standard Life and Scottish Widows Investment Partnership, both based in Edinburgh, are Scotland’s three largest fund managers.

Standard Life oversaw 137 billion pounds as of Sept. 30, while Aberdeen had 129 billion pounds on June 30. Scottish Widows runs about 135 billion pounds after taking on money from another part of parent Lloyds Banking Group Plc.

Scottish Widows started adding to U.K. commercial property investments in September, moving to “overweight” in its mixed- asset funds from “underweight” the previous two years, said Ken Adams, head of global strategy.

‘Cheaper Than Stocks’

“U.K. commercial property is cheap and cheaper than stocks,” Adams said in an e-mail. “Credit is, broadly speaking, close to fair value.”

They all expect stocks to continue to rise in 2010, though not as much. Turner predicted increases of less than 10 percent for markets next year, while Adams forecast a total return of 10 percent to 15 percent over the next 12 months.

The MSCI World Index is up 26 percent this year. The index has gained 68 percent since March 9, when it was close to the lowest level since at least 1995.

Milligan said a key catalyst for the markets next year will be how central banks and governments around the world withdraw measures designed to tackle the financial crisis. For example, the Bank of England bought bonds to increase the amount of money in the market.

Potential Volatility

“We certainly see the stock market continuing to improve into 2010 and we should see more evidence that companies are able to generate profits and investor confidence should improve,” Milligan said. “We’re certainly warning clients that there could be more volatility.”

When it comes to commercial property, the strategists are still reticent about the U.S. market because they said prices may have further to fall. In the U.K., yields on shopping centers and offices have jumped as prices fell.

“We’ve put money into U.K. commercial property funds,” said Turner. “We’re not anticipating any significant capital performance, but just the yield alone.”

Prime malls in Britain yielded 6.85 percent in October compared with 4.85 percent two years earlier. For offices in the City of London financial district, yields rose to 6.5 percent from 4.75 percent, according to data from property adviser CB Richard Ellis Group Inc.

The yield reflects the income from rent as a proportion of the value of the asset. By comparison, the yield on 10-year U.K. government bonds is about 3.65 percent.

Land Securities expects prices for commercial property to rise over the next five years “by ripples,” Chief Executive Officer Francis Salway said when the company reported earnings on Nov. 18.

“There are opportunities out there for people to begin to build up a property portfolio and more will appear,” Milligan said. “We’re actively considering what our position should be. Investors don’t want us to sell.”