Commercial Property is going off the boil...
The finance world is pretty jumpy these days. Share prices, credit markets, property valuations ... lots of investors are feeling very worried at the moment.
And much of that concern stems from literally not knowing what's actually happening.
At least it's very easy these days to find the up-to-date prices of your share portfolio.
But if you want to know what's going on right now in the commercial property market, who do you ask?
Estate agents? Not sure how balanced the view would be.
Banks? Probably feeling manically depressed right now after their recent Stateside experiences.
So why not go straight to the horse's mouth? Listen to the quoted property companies, the businesses that actually own the buildings.
And today, we have that chance. Because the UK's second largest real estate investment company (REIT),British Land
(LSE: BLND)
, has reported results.
At first glance, the headlines make OK reading. For the three months to the end of June, underlying pre-tax profits rose 4% to £76m and net asset value inched up by 3% to £17.30 per share, in line with analysts' expectations.
But it is the accompanying statement which is of most interest to investors with an overall interest in the state of the UK commercial market.
And here the company is rather more cautious: "More difficult credit conditions are likely to lead to less new buildings being put up because some people will find it harder to raise the money and be more nervous about finding tenants."
That doesn't sound horrendously bearish. But the reality is that the property downturn hasn't hit the company. Yet, though it's on the way. Because changes in official property valuations lag several months behind market deals as valuers await hard evidence.
So property company results won't start to reflect a market downturn until the end of this year. Also many property companies unable to sell assets will take them off the market rather than drop the price.
Cooling down
Property returns are already at their lowest monthly levels for 12 years, according to the latest figures from respected property monitor Investment Property Databank (IPD) which is seeing "a significant market slowdown" and says that "overall expectations are falling".
Average total returns, namely rent plus capital growth, were just 0.2% in July, says IPD. Prices for retail and industrial property fell in the month by 0.6% and 0.3% respectively. Only the office market bucked the cooling trend with a 0.3% rise. Although these falls were small, their significance is that they follow more than five years of consistently rising monthly prices to record levels.
To finish up, a bit of anecdotal evidence.
Yesterday I had a meeting in the City, my first trip back there for some years. Hoofing round the Square Mile these days is like negotiating a giant building site. Cranes everywhere. It's the biggest redevelopment since the 60's concrete overdose.
And everywhere I looked, there seemed to be "To Let" notices on empty offices after empty office.
If ever a market feels like it's going off the boil, this is it.
So what to do now?
British Land shares have fallen by 30% since the start of 2007 and by about 8% since my article about REITs a month ago. I suggested then that the property sector looked one to avoid.
Rental yields have fallen a long way and debt costs are rising sharply.
There will be a time to buy REITS when property pessimism has peaked. But I don't believe we're there yet and I see no reason to change my cautious view for now.
More:Is The Crisis Over?
