SAVILLS looking oversold

The Times January 02, 2006
Commercial property set for another boom year
By Jenny Davey

BRITAIN is on course for another bumper year for commercial property investment in 2006, after a record £50 billion of offices, shops, leisure outlets and industrial buildings changed hands in 2005.
CB Richard Ellis, the world’s biggest property consultant, said that £43.7 billion of commercial properties had changed hands by the end of November. After a last-minute rush to complete deals by the year-end, £50 billion of transactions are expected to have been finalised before January — boosted by a £13 billion spending spree by German, Irish and Middle Eastern investors.


After overseas investors, pension and life companies and other institutional investors were the second-biggest spenders. The institutions had splashed out nearly £12 billion by the end of November — a figure that comfortably beats the £10.6 billion they invested in 2004.

Private property groups had invested £8.4 billion by the end of November, outstripping the £5 billion spent by listed property groups, according to CB Richard Ellis. Meanwhile, private investors had accounted for £2.9 billion of deals by the end of November.

The Central London office market was the biggest beneficiary of the commercial property boom, with close to £13 billion expected to have been invested in deals by the end of 2005.

Shopping centres have also been in strong demand, with an estimated £8 billion of deals expected to have completed in 2005.

Offices outside Central London and individual shops were also favoured by investors, each having attracted more than £4 billion of investment by the end of November.

The investment boom comes as CB Richard Ellis predicted that all property returns measured by the Investment Property Databank’s annual index for 2005 would end the year at more than 17 per cent and could even edge close to the record 18.3 per cent return achieved in 2004.

The enthusiasm for commercial property investment among a wide range of investors has pushed rental yields down to record lows.

David Wylie, associate director at CB Richard Ellis, said that 2006 would see property continue to deliver a strong performance as property rents, particularly in Central London, begin to rise.

He forecast that offices would overtake retail property as the best-performing sector, but he cautioned that returns would fall from the exceptionally high levels delivered in 2004 and 2005.

Lord Oakeshott of Seagrove Bay, joint managing director of Olim, a property fund manager, played down fears that the commercial property market may be overheated amid soaring capital values and record low yields.

“Property yields may seem low to old hands but trying to look at the market with fresh eyes, property yields at 5 or 6 per cent look perfectly good value compared to gilts at 4 per cent and long-dated gilts at 1 per cent,” he said.

Lord Oakeshott said that commercial property benefited from long-term quality and stable rental income. He said that in an era when inflation appeared to be under control and the Bank of England sets interest rates, the property market was likely to be less volatile than it had been in previous economic cycles.