The evidence of the most recent IPD Monthly Index of UK commercial property returns indicates that the decline in the sector is slowing. During April, the Index saw a totalreturn of -0.5 per cent month-on-month, a slight improvement on the -0.8 per cent recorded in March. More significantly, it continued the upward trend since the -3.7 per cent return seen in December 2007.

Malcolm Frodsham, IPD research director, observed, ‘For those investors who thought we had reached the bottom in the first quarter of 2008, these numbers will be unsettling at best, while flat rents over the month raise the spectre of a ‘double-dip’ capital values fell by one per cent in April after a 1.3 per cent fall in March and a 1.5 per cent fall in February. On an annual basis, however, All Property total returns hit a record low of -11.7 per cent year on year in April.’

Increasingly, investors looking for exposure to the commercial property sector are turning to the derivatives markets. As property prices have fallen, investing in the derivatives market has become a tempting option for those trying to buck the economic downturn.

Nick Trowell, property lawyer at Heatons LLP, observes, ‘Investing in commercial property derivatives could be a good option for investors, as this may translate into commercial property becoming more attractive as an investment generally, in view of falling property values. Property derivatives can be advantageous to investors as it is a chance to speculate, and potentially accumulate, on the property market without having to exchange physical property.

‘Investors can swap portfolios if they lose interest in a particular sector and can gain more presence in the property market. It’s definitely a buyer’s market at the moment, and commercial derivatives are having a resurgence. The cost of a one-year commercial derivatives contract has risen from record lows earlier this year and prices have increased by 50 basis points in the past few days.’

An iron floor
There are also signs of support for prices in the residential property sector as housebuilders restrict new supply. Neil Lewis, CEO of Property Secrets, argues,
‘By standard economics, the collapse in the demand for houses, as shown by the ability to sell new homes, should mean a collapse in house prices. But while new buyer demand for new homes may have collapsed, the general demand for homes is stable, because everyone is still living in a home, whether they rent it or buy it.’

He observes, ‘Persimmon, the UK’s biggest home builder, has stated that they will close all new sites. This means that they will build their existing projects more slowly, but they will not begin any new projects. The effect of this is to suck supply out of the market. I think Persimmon have made a smart move and are planning on a two to three-year slump in construction.’

Lewis argues, ‘If the big housebuilders had continued to construct as before, and offered price cuts or added incentives, they simply would have put themselves out of business. This means a very tough time ahead for the construction industry and knock-on effects on the wider economy. However, UK property will, when it finally emerges, see a sudden jump, strong demand and an industry not able to match this demand with supply. This means smart housebuilders who have built up cash reserves and land will be in a strong position to benefit from a UK property upswing, starting around 2011. Until then, UK property is a strong hold. An iron floor underneath UK property prices will ensure they do not crash or collapse.’