By JIM DOW

CAUTIOUS optimism on how commercial property would fare this year was the tone at recent Scottish investment seminars held in Edinburgh and Glasgow by Drivers Jonas - along with the suggestion that “clean sheet” investors were well placed to focus on good buildings in prime locations offering solid income streams.

David Murdoch, managing partner for Drivers Jonas Scotland, asked what the options for equity investors were. “Gilts and equities are producing low returns of 4 per cent (for gilts) but given the opportunity to purchase property at far cheaper prices than even a year ago, the sector’s attraction is clear. Prime yields are pushing upwards of 7 pc and we foresee these bottoming out towards the end of this year. We see a straight 9 pc return as a trigger for investment acquisition.”

Meanwhile, colleague Sandy Gilmour said: “Although the medium-term outlook is that rents will continue to fall, we forecast that there will be a positive yield gap of 5 pc by Quarter 4. Traditionally prime assets had to be in an excellent location with secure income – today’s discerned investors are now seeking a minimum income stream of 10 years, with excellent covenants, in addition office buildings need to be well specified and perhaps the wish list may soon include a buildings energy performance or green credentials.”

The pattern of falling rents in all sectors was considered inevitable, but the delegates in attendance suggested that office retail rents would be the first to emerge from the doldrums.

David Murdoch: the sector's attraction - cheaper prices - is clear

Drivers Jonas reported that it expected capital values to fall at least a further 10 pc in 2009, and that secondary properties with short leases would be particularly badly hit given the shortage of bank debt for lower grade properties with limited income security.

Gilmour said he felt that the positive yield gap was beginning to look attractive to recovery funds and new investors not burdened with existing debt structures, and this coupled with the weakness of the pound against Euro and Dollar rates provides a compelling case for investment.

He added: “We are mindful of the economic woes and do not feel values have bottomed out yet, but this could be an opportunistic year for those assembling portfolios from scratch.

"The relatively high running yields on offer for good quality property and the prospect of medium term yield compression could prove to be a driver for good quality assets. That said, secondary property will be difficult to sell and the value of poorer quality properties seem destined to fall further.”