CompropScotland Logo01:10, Saturday, July 04, 2009
The online Commercial Property Newspaper for Scotland


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How to satisfy investors with growing wish lists

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
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.”

Braveheart buy by Highcross

By Edward Marr

A multi-let investment previously owned by Tannson, a house-building firm which went into receivership last year, has been bought by Highcross for £2.06 million, reflecting a net initial yield of 11.12 per cent.

The property, Wallace House, in the centre of Stirling, is a five-storey modern office building extending to 26,000 sq. Once the remaining four vacant office suites, totalling 5,600 sq ft, are let, the total annual income will be approximately £320,000, a rate of £12.50 a sq ft .

The tenants in the let space include The Secretary of State for the Environment, Hays Recruitment, Land Securities Trillium, Provident Financial Management Services and Progressive Financial Services.

Rod Leslie, from the Edinburgh office of Savills’, who advised Highcross, said: “Wallace House provides a well specified and modern office in Stirling city centre. It is let to good quality covenants, provides a secure income return to Highcross and offers obvious asset management opportunities, which will enhance the long term value.”

Mark Evans, of the Highcross Scotland office, added: “The combination of secure income and the ability to add value following a refurbishment programme, makes Wallace House an attractive opportunity for Highcross.

"This asset was acquired for our recently-raised third fund which focuses on the regional markets throughout the UK.”

Andrew Peel of Graham & Sibbalds acted for Tannson, having been appointed by receiver Ernst & Young.


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