Commercial Finance Specialists

Asset management firm Schroders has predicted 2010 to be a volatile year for UK commercial property, as economic uncertainty and debt issues continues to damage a market that is struggling its way out of a two year downturn.

Commercial property values experienced their first monthly increase in almost four years in October after dropping 44 percent following their peak in the middle of 2007, but the possibility of the market continuing to be hit by further tenant failures in a weak economy is still very real, Schroders said.

Mark Callender, head of property research at Schroders, said:“The market will be more volatile. We may have avoided a double dip recession next year, but our economics team is not ruling out a long period of slow growth”

A rising chorus of investors have shown concerns in the UK commercial property market, Europe’s second-largest after Germany, warning of a short lived recovery if values rise too quickly without growth in the economy and rents.

There is also the threat of a hit to property sales from banks which over indulged on UK commercial mortgages during the boom times. Callender said a possible £30 billion of those mortgages and bridging loans could still be under water.

‘It has become a more distant threat but it’s not one that we should ignore when at the same time we’re seeing the income from portfolios start to fall, which should impact the ability to pay interests,’ he said.

Schroders, which manages £7.5 billion in property related funds, predicts UK commercial property total returns, including rental income and capital value growth, to be 2 percent in 2009, increasing to 18 percent in 2010 with total returns expected to drop back to -2 percent in 2011, as an over optimistic investment market drives up prices for some properties triggering a correction in values.

Schroders, which is aiming to raise up to £400 million by the middle of next year to form a UK property opportunity fund, hopes to invest selectively and may attempt to join forces with banks, head of property William Hill said.

“At the moment we find long lease properties over priced and will concentrate on assets we can do something to, whether to improve planning consent or re-position assets banks need to sell,” he added.

Other property investors such as Legal & General and London & Stamford have recently shown an interest to work with lenders such as Lloyds and Royal Bank of Scotland Group to detox their troubled property loan books.

‘At the moment banks are very reluctant to sell their distressed assets to buyers looking for 20%. As time go by, I think there will be more opportunities to partner the banks as opposed to buying distressed assets,’ Hill said.

Written by Sam Gooch