I have been trawling the net and the newspapers to find something positive to say about the current commercial and serviced office property market. But, even my favourite, bullish investor Don Jordison, manager of Threadneedle UK Property Trust, has gone all bearish on me.
He said the property derivatives market indicated there would be capital deprecation this year. He has been moving more into cash, in anticipation of falls in value. Jordison said: ‘Total return swaps are trading at between 3% and 5% for 2011 and although we think that is a bit pessimistic, we will see capital depreciation over the next 12 months given the quasi-recessionary environment’. He continued, to state that it is expected ‘properties will stay empty for longer and you have to expect company defaults. The government spending review is also deflationary and, given that rental growth tracks GDP growth, it is unlikely to see any.’
Jordison, whose £301 million fund returned 5.7% in the 12 months to the end of November 2010, has increased cash weighting in anticipation of this pull back.
‘Our cash target until recently has been 10% but we have upped that to between 10% and 15%,’ he said. ‘We are looking to hold a bit extra back because you have to be prepared for redemptions from investors if they lose their nerve in the wake of falls in capital values.’
Jordison said there were concerns about the amount of loans sitting on the banks balance sheets.
‘The big elephant in the room is still the banks,’ he said. ‘They haven’t acted against the £130 billion of loans against commercial property which are due by 2013, so we think there will be realisations.’
Quantitative easing has been credited by many, including Jordison, for fuelling the recovery in commercial property; but now it has halted and the banks moves to call in loans on property will act as a drain on liquidity in the market, thus affecting prices. Jordison believes that for investors this ‘means there will be opportunities but it also means every time there is more liquidity in the market, it could be used to sell out of commercial property, and that will keep prices from spiking.’
The London commercial property market remained separate from the rest of the UK to a degree. Buller said: ‘London market growth is sustainable because of the flow of capital coming into London from sovereign wealth funds and other overseas investors, including governments.’
Jordison said big prices would still be paid in London, although he believed that this alone would not be enough to prevent capital depreciation in the UK as a whole. He also, has raised his cash target in anticipation of potential falls in values.
