UK commercial property market falling as well

The Telegraph notes today that Vulture Funds are circling the London Commercial Real Estate (CRE) market. Prices have fallen, but funds are waiting for the other shoe to drop before stepping in. I imagine this will mean credit losses for financial companies in both residential and commercial property markets before all is said and done in the UK.

Although there are early signs that the equity-rich investors are starting to invest, the fact is that most buyers are waiting for further falls before they make their move.

Patrick Vaughan, one of the founders of London & Stamford and a veteran of three property slumps, has raised nearly £500m of equity to invest. Even in today’s debt-starved market, he estimates that sum could give him spending power of up to £1bn.

Despite this weight of money he is still not sure the time is right. He says: “I am ready to buy if the seller is ready to sell. But we both want the same thing, value. I want a bargain and the sellers aren’t ready to meet the price. At the current pricing, where yields are still below the cost of money, I don’t believe it makes any sense.”

What Vaughan is talking about is the relationship between interest rates and rental yields. Like many investors, he takes the view that property deals only make sense when rental income covers the interest costs.

Falls in prices over the past few months mean that rental yields are hovering around the 6 per cent mark. Vaughan estimates that, given the increased margins being charged by banks, this will have to be nearer 7 per cent before commercial property offers real value. Very roughly, this means that prices would have to fall a further 15 per cent before Vaughan makes his move.

“You cannot increase the cost of money without it being reflected in capital values,” he explains. “Which is one of the reasons why there are no deals going on at the moment. It does not make sense for buyers to pay yesterday’s rates with tomorrow’s money. We will have to see who blinks first – the buyers or the sellers.”

While Vaughan’s view is gloomy, he is not alone. Jamie Ritblat, the media-shy chief executive of private property company Delancey, recently predicted that the property market would fall further. Although he has more than £1bn of equity to invest, he said he was in no rush to spend it.

Commercial property investors bide their time, The Telegraph, 25 May 2008

See also: Other posts under the label ‘UK.’

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