This view is shared by David Royce, of property investment firm London and Oriental: "The fall in the commercial property market is well reported in the press, witnessed by the large property companies seeking rights issues, and evidenced by the deals done at around 45 per cent below the peak of the market - albeit very few. Whilst yields are at very high levels the risk of falling rents and corporate failures make it important to pick well secured stock.
The problem at the moment is lack of liquidity and lack of stock. While the banks continue their deleveraging process very little funding is available for purchasers and while the banks deliberate on their course of action the "distressed debt stock" will still not hit the market. Once this sclerosis is overcome we shall see action in the market and a return to a healthier commercial property market."
The sector, which comprises of six trusts focused on direct investments in the UK commercial property sector, has a very diverse distribution of returns, with the spread between the best and worst performing funds weighing in at a staggering 57.28 per cent.
Source: Financial Express Analytics
The best performing fund was the UK Commercial Property Trust which returned -23.31 per cent over the year to the end of January 2009. By contrast the Invista Foundation Property Trust fell 86.12 per cent over the same period, closely followed by the ING UK Real Estate IT that lost 79.9 per cent.
Key to the large losses incurred by these funds has been the dramatic widening of their NAV (net asset value) discounts, in Invista’s case the NAV discount increased from -34.93 per cent at the end of 2008 to 74.82 per cent a year later.
Despite the heavy losses of investment trusts, the asset class as a whole looks to have fared reasonable well when compared to equities; according to the Investment Property Databank (IPD) UK Quarterly Property Index for the fourth-quarter of 2008, UK Commercial property fell 22.1 per cent over 2008 while the FTSE All Share fell 29.93 per cent over the same period, suggesting either that the property bubble was smaller or that the property market has corrected quicker.
Malcolm Frodsham, IPD research director clearly believes the latter is the case: "The last 12 months has set a number of unwanted records in real estate returns with the worst ever year capping the worst ever month and worst ever quarter in IPD history. Such has been the severity of the falls in values that on a pure comparison basis the UK market now looks attractively priced, whether this matters or not to investors depends on an easing in the financial situation."