IFAs urge investors towards commercial property

IFAs urge investors towards commercial property


IFAs are advising their clients away from residential property, encouraging them to invest in commercial property instead, according to a recent survey. 

Carried out by the online property data source, Reita, the survey questioned 270 IFAs in the run up to the general election and found that only 39% of the those questioned think investors should consider residential property, compared with just over half (51%) in January.


With property prices on the rise, yet mortgage lending at the lowest in a decade, (according to recent figures published by CML), the data will come as a blow to those hoping to see increased movement in the residential market.


Nikki Cann, associate director of the National Association of Commercial Finance Brokers (NACFB), said:“There are probably several factors driving this trend. Recent ARLA figures have shown that the average rental yield on a residential investment is 5.1%, whereas according to Capital Economics, the average yield for commercial property is 6.7% – and in addition, ARLA suggests the proposed changes to Capital Gains Tax could impact on an already beleaguered residential buy-to-let market.”


However, she also warned that a sudden influx in commercial property investment could artificially inflate prices and bring about another slump.


“It’s important to bear in mind that this recovery is still fragile. There is no doubt improvement but it’s very early days. One swallow does not a summer make,” she said.   


NACFB CEO, Adam Tyler, also warned of the imbalance of growth between the South East and the rest of the country, which could cause some ‘overheating’, and added that novice investors should exercise caution.


“Commercial investment is still one for those in the know and not for those unsophisticated in this market,” he said.


Dave Butler, director of corporate affairs at Grainger plc, suggested the decreased confidence in the residential housing market could be attributed to the uncertainty over the economy and doubts over whether recent rises in house prices can be sustained.


“Threats to raise CGT rates may also have raised concerns amongst some residential investors, particularly Buy to Let Landlords, but these may also create some interesting buying opportunities for those in the residential market for the long term,” he added.


However, when questioned about the stability of commercial property prices, IFAs were considerably more enthusiastic, with two thirds believing commercial property prices will rise by up to 14% in the next twelve months.


This is a considerable increase from October 2009 when just over half felt confident of a rise, and just a quarter in July of the same year.


Only 8% believe prices will fall during the same period (12% in October 2009 and 40% in July 2009).


And it is these expectations that are now feeding through to the advice given by IFAs to their clients. Indeed, according to one property expert, commercial property hasn’t traditionally been an area where advisors have felt very confident advising in, however, when asked about their confidence in the area, 41% answered that they were confident, up from 33% in October 2009.


Patrick Sumner, chair of Reita, said: “The IPD capital value index is showing clear signs of peaking after a strong run since mid-2009. Behind the average, however, there is a clear gap between prime, well let assets and secondary.”


However, IFAs are still largely unconcerned that the rise in commercial property values will increase the risk of excessive demand for property funds. 72% are unconcerned at the moment, compared with 79% in January 2010, while 18% are concerned now (19% in January 2010).


Peter Cosmetatos, programme director of Reita, commented on the specific political factors that coincided with the timing of the survey, he said: “The survey was conducted in the run-up to the general election – a period of some uncertainty – so the IFAs were more up-beat than might have been expected.


“However, with a hung parliament being followed by a coalition government, and coinciding with the debt crisis in the Eurozone, the period of uncertainty has continued beyond the election.


“It will be interesting to see, in the next survey in July, whether all this upheaval will have any impact on IFA expectations and sentiment. We do not expect the caution, which has significantly diminished in the last nine months, will disappear altogether, as the recovery of property prices is patchy, across different sub-sectors and regionally.”

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