The United Kingdom commercial property sector has gone through a signiÂficant slump in the past year with capital values falling an average of 15% since June last year, reports investment broker at Broll Property Group, David Adams. This market, says Adams, provides an excellent opportunity for South Africans to use offshore allowances or asset swaps to create offshore assets with the UK property pricing, therefore gearing with positive cash flows.
Bleak forecasts on rental growth and the UK banking sector’s tightening on property lending have softened the yields considerably, observes Adams.
“For the first time in years, some properties with long leases and strong covenants have net initial yields higher than their all-in lending rates. In layman’s terms some UK properties, which have long, strong tenancies, have net incomes greater than the repayments on the total costs of borrowing the entire purchase price of that property,” Adams says. Achievable loan-to-value rates stand at between 70% and 80% on strong covenants, he says.
“This presents an interesting buying opportunity for South African investors as they now have the ability to buy in a low UK market, which is normally very difficult to break into,” says Adams.
Unlike the UK market, the South African commercial property market has not yet been hit as hard by the credit crunch and, after six years of strong growth, many South African investors have built up significant equity in their portfolios.
In most cases, Adams says, this equity is totally exposed to the South African property market and the rand. “The diversification play of investing in UK property brings the advantages of investing in a property sector that has already seen a significant correction, is attached to first-world currency and in a very stable country,” he says.
Adams recently travelled to the UK and to the MIPIM property conference in Cannes, France, to better understand the particular dynamic of the European, and specifically the English, property market and to source new opportunities for Broll’s clients.
“The highest yields are typically in the industrial sectors outside of the south-east, where 8% yields, and even 8,5% in some cases, are achievable on more complicated properties,” Adams says.
“As always there are many pundits saying that the UK commercial property market still has downside and that if the UK goes into recession rentals will stagnate. However, most analysts agree that if you can afford to wait for a few years for the cycle to change, there is signiÂficant upside and very limited downside in a solid property with strong 10-year covenant easily covering interest payments and estimated rental value upside,” says Adams.