LSH: Superb time to buy as values hit decade low

The first quarter of 2009 saw UK commercial property transaction yields reach their highest levels for a decade, reflecting continuing falling capital values, with foreign investors taking advantage of low prices and a weak sterling, according to research by Lambert Smith Hampton.

The average yield on transactions in the first three months of this year rose by 97 basis points to reach 7.84%.

Peter Skelton, head of LSH's Manchester office, said: "The ability to secure bank finance was the fuel that drove commercial properties success as an asset class over the last 10 years. As we all know the lack of available debt finance is putting the breaks on the market. Some banks will lend but the terms and costs are not attracting borrowers. The banks are focusing on the security of income on existing loans and not wishing to increase their exposure to this sector.

"The upshot of this has spawned some superb deals for cash rich investors who don't mind getting their hands dirty with some asset management. So, for an informed and seasoned investor with some property nous and ready cash, now is be the right time to be in the market."

Ezra Nahome, head of capital markets at LSH, added: "The commercial property market is offering better value now than at any other time this decade.

"Trading levels are down significantly and yields have moved out across the board. The value of transactions in the first quarter of this year was down by almost 50% on the first quarter 2008 figure, with £3.9bn of deals completed."

Two transactions accounted for almost one third of the value of this quarter's total; the £600m Dawnay Day portfolio sale and the £588m Meadowhall Shopping Centre transaction in Sheffield.

Offices have seen the sharpest slowdown in activity of any sector with £1.2bn of property changing hands in the last quarter compared to £4.2bn this time last year.

The office sector has also seen the largest shift in yields, with the latest transaction yield standing at 8.12%, an increase of 336 basis points from their low point in 2007. This represents a 41% decline in values since the height of the office market.

The most significant sellers in the market continue to be the UK institutions. So far this year they have sold £1.6bn of property and this has come on top of the £10.8bn of sales in the previous 15 months. Over the same period they have made purchases totalling £4.3bn, resulting in net disposals of £8.2bn since the start of the credit crunch.