U.K. Commercial Property Prices May Decline, Biggest Funds Say

U.K. Commercial Property Prices May Decline, Biggest Funds Say


May 14 (Bloomberg) -- U.K. commercial real estate prices may fall next year as investors’ enthusiasm for buying stores, offices and warehouses wanes, according to the managers of the country’s largest property mutual funds.

Banks will put more assets on sale as they refuse to refinance loans maturing next year that borrowers are unable to repay, said Gerry Ferguson, who oversees Lloyds Banking Group Plc’s 2 billion-pound ($2.94 billion) SWIP Property Trust.

“We have reached the point where we are trying to take a step back from parts of the market where it has got ahead of itself,” Ferguson, 57, said in an interview in his Edinburgh office. “Capital growth is slowing down.”

Prices have rebounded 13 percent since last July as companies including Standard Life Investments and Aberdeen Asset Management Plc turned to commercial real estate after a rally in stocks and corporate bonds. The value of U.K. stores and offices collapsed 44 percent in the previous two years as the economy endured the worst recession since at least 1945.

Philip Nell, who oversees the 1.8 billion-pound Aviva Investors Property Trust in London, also predicts that prices will post a decline for 2011.

Fiona Rowley, who manages Prudential Plc’s 1.4 billion- pound M&G Property Portfolio, said she may revise her current forecast for a 3 percent increase in prices next year should this year’s advance continue at the same pace. M&G Property Portfolio has spent 500 million pounds since August buying offices, shops and warehouses.

Slowing Momentum

“Our forecast is based on the assumption that the momentum will slow down in the second quarter,” Rowley said. “The more positive capital uplift we see this year, the more negative it will be next year. It would be robbing Peter to pay Paul.”

All three funds are in the bottom third among their peers when it comes to performance over the past 12 months after keeping at least 20 percent of their assets in cash, according to figures from Chicago-based researcher Morningstar Inc.

The SWIP Property Trust had net inflows of 950 million pounds in 2009 and invested 500 million pounds of that, Ferguson said. He plans to spend about 200 million pounds buying more real estate in 2010, while selling about half as much.

The Aviva fund also holds shares of real estate companies. Land Securities Plc, the largest real estate investment trust in the U.K., is up 36 percent over the past 12 months.

“We are still pretty cash positive, but we are not necessarily going to invest that in the immediate future,” Nell said. “We have come through a hugely difficult two-and-a-half years. To have bounced back so quickly is surprising.”

London Offices

SWIP Property Trust has favored the central London office market since the fourth quarter of last year, Ferguson said. The Aviva fund bought retail space as the U.K.’s economy recovers.

The SWIP Property Trust returned 12 percent over the past year, ranking it 32nd of 37 similar funds, which gained an average of 23 percent, according to Morningstar. Aviva Investors Property Trust posted an 18 percent return, placing 27th, and M&G Property Portfolio increased 19 percent, putting it 24th.

The three managers all said net inflows into their funds, which reached record levels between September and March, have slowed since the start of last month.

“There’s been a bit of a pause for reflection and the market will fall a little bit over the next few months,” Nell, 39, who expects prices to dip 3 percent in 2011, said by telephone. “It won’t be material.”

Rates of Return

Commercial property prices rose 3.9 percent in the first quarter, according to Investment Property Databank Ltd. That was the third-biggest quarterly gain in 20 years and followed the 7.4 percent record gain in the previous three months.

One key factor is how long interest rates will stay at record lows and whether rents start rising, said Ferguson. The U.K. base rate has been at 0.5 percent since the Bank of England cut it from 1 percent in March last year.

“If the yields on U.K. government bonds go up, then property yields should move up,” he said. Yields on bonds and real estate move inversely to prices. The yield on 10-year U.K. government bonds was 3.84 percent yesterday, up from 3.66 percent a year before. “If you are not going to see rental growth and the gilt yield is 4.5 percent, why not buy gilts?”

source: bloomberg.com