UK property market more bi-polar than ever as investors seek safety

By Bridging Loan Directory -

 

Institutional investors are still reluctant to put risk on the table when buying commercial property and the division between prime and secondary markets is likely to grow as a result, according to research from Real Estate Fund Managers PRUPIM.

PRUPIM’s latest Real Estate Perspective report says that expectations of flat-lining domestic economic growth are leading investors increasingly to prize secure prime assets with limited growth potential, over secondary assets which may offer greater growth opportunities over the long term.

Although potential yields from secondary assets are often more  promising, the  challenging nature of the occupational environment means investors will continue to show a strong preference for assets which are perceived to be more “prime,” the report says.

Richard Gwilliam, PRUPIM’s deputy head of research, says: “As cash-rich overseas investors, seek safe havens, the UK commercial property market is arguably now as bi-polar as it has ever been: yields on prime assets are being driven down, while investors of all kinds are still generally wary about secondary assets, which may offer more value over the long term.”

He adds: “The high prices quoted for some of the “primest” assets has forced some investors to look for better value elsewhere, and selectively increase exposure to good secondary assets. But, overall, secondary and tertiary stock continues to be shunned, by investors worried that a long-term stagnant economy will subdue rental growth, the engine of property returns.”

PRUPIM also warns that the impact of weak occupational demand will be compounded by the continued lack of debt finance for riskier assets, which implies a widening price gap between prime and weaker secondary property in the short term.

At a sector level PRUPIM notes that weak economic prospects mean the outlook for prospects for office and retail sales markets are particularly polarised, with investors prizing trophy London offices; and consumer nervousness and the online shopping boom driving up vacancy rates and weakening rents in more secondary retail locations.

“The gloomy economic outlook implies investors may focus on asset managing their investments ready for the upturn, rather than making changes to investment strategy,” says Gwilliam.