Is now the time to buy?

A view on whether to buy now or wait ......

Property prices across the commercial sector have fallen dramatically from the peak in 2007, as a result of a number of factors. However with interest rates at an historic low, and property yields moving outwards is now a good time to acquire?

On the upside, why should you buy? The gap between interest rates and property yields has never been wider, and with most other classes of investment losing value, or showing no real return, property suddenly looks good value. However the rational for buying will depend on whether the purchaser is debt funded or capital rich. For capital rich buyers receiving little or no interest on their money on deposit, a return of between 8 and 10% looks very attractive. For debt driven purchasers, the ability to acquire will depend on whether they can borrow and at what rate of return, to ensure there is sufficient gap between the return on the property and the loan, so that the principal debt can be paid off.

The return will depend upon the perceived risk of the acquisition, and therein lies the conundrum. If the tenant remains in occupation and pays rent then the purchaser will have acquired a good buy, however if the tenant goes into administration and defaults, the purchase looks less positive. However no investment is without risk, a number of high profile businesses have gone "to the wall" over the last 12 months, as a result of the credit crunch, too much debt and a lack of confidence within the general economy. These business failures mean investors may have lost their invested capital, as shares become worthless. There is nothing tangible in shares, were as property is tangible. The facts are that if an occupier does default, the owner still has an asset under their control, which they can re-let. The important issues in considering any purchase are therefore tenant covenant and location.

In today's market it is all most impossible to consider any occupier (other than the government) as blue chip, therefore location and asset class are the important factors. What is meant by asset class is, the type of property i.e office, shop etc. The property must be as well located as it can be for its use, and ideally it is best to acquire premises where there is a limited supply of that class.

If the right property can be purchased at the right price, I believe now is a good time to buy. There is risk associated with any purchase, but with double digit yields available and all other asset classes under performing, as part of a diverse portfolio property should be included. For owner occupiers the rational is even stronger, especially with the benefits of SIPP1s and the knowledge that they can buy at prices below what would have been available over the last 2-3 years. If they are paying the rent, they will know how secure they are. For those individuals with limited surplus capital, syndication of funds may provide opportunities. My view is now is a good time, the million dollar question is, will prices fall further, or are we at the bottom of the cycle?

For further information please contact Sam Kingston.

Date Added: April 22nd 2009