'Short Sharp' Correction Shaping UK Market

LONDON-Although 2008 has been shaky for the UK commercial property market–with declining property values, a credit crunch, and a wave of sales from distressed sellers–a “good upside” is not far away. That’s according to a recent report from the UK real estate team at Credit Suisse Asset Management. The analysts predict that about midyear, a relaxing of the credit crunch, a growing economy, and sustainable real estate fundamentals will turn the gloomy picture brighter.

Calling it a “short sharp correction,” the analysts predict better price discovery among monthly and quarterly valuations and property derivatives and a more transparent securities market that was not present during the last major downturn in the early 1990s. Compared to that time, the market is more sophisticated and international, with a greater cross-section of institutional and retail investors from many countries. The report, called “Don’t Panic, Mr. Mainwaring,” notes that international investors will benefit from the weakening pound and that higher distribution yields will appeal particularly to large German open-ended funds.

Directed by David King, head of the UK Real Estate Team, Credit Suisse analysts have witnessed several capital raisings for “vulture” funds seeking to benefit from distressed selling from retail funds and possibly private property companies. Some cash-rich property companies, they note, also are viewing the correction as a buying opportunity. “Towards the end of 2008, we are likely to see the large Life funds, which represent a sizeable proportion of the UK real estate market, increase their allocation to real estate as they see long-term value, following nearly three years of net disinvestment,” analysts explain.