Assetz® News - SMALL OFFICE MARKET CONTINUES TO THRIVE AS GRADE A COMMERCIAL MARKET SLOWS

SMALL OFFICE MARKET CONTINUES TO THRIVE AS GRADE A COMMERCIAL MARKET SLOWS

17th July 2007 |

Commercial property sub sectors such as the small office market are continuing to thrive, as confidence in Grade A commercial property (large office buildings) wanes, reports Assetz.

Standard Life, Prudential, Norwich Union and New Star have all raised the cost of exiting their property funds in the last few days, as investors lose confidence in the performance of the market. As property is an illiquid asset, this move is intended to protect remaining fundholders by covering the costs of selling property assets, to cover redemption payments.

While private investors are still buying into the funds, large institutional investors are withdrawing from the Grade A commercial property sector, which includes large office buildings such as The Gherkin and HSBC Tower, as yields drop below 5%.

In comparison, the small office sector is performing extremely well, driven by a shortage of new small office units in key locations such as the North and Scotland, where many developments are selling and even tenanting in advance of completion due to the lack of availability. The Assetz Commercial Fund No. 1, launched in November 2006 and targeting the small office sector, is already performing well with prospective yields on its acquired portfolio of 9% or more. Tenants are beginning to sign up, including a blue chip Bank in Stafford.

Stuart Law, Managing Director of Assetz comments:

“Small and medium-sized enterprises make up 97% of the UK business population and yet their requirements are not well catered for. This new route into commercial property investment is already generating strong yields and providing a profitable route into the commercial sector for pension investors."

The second in Assetz’ series of closed property funds, The Commercial Property Fund No.2, launched in May 2007, is purchasing a number of UK small office units up to a value of £5 million, using £1.6 million of equity from investors and raising the remainder through bank gearing. The units, each with 2,000 – 10,000 sq ft of space, are being bought off plan to achieve a rise in value of typically 20% once the building is tenanted with a target yield of 8.5% - 10%.

Stuart Law continues:

“Substantial Grade A commercial property has proved attractive to pension funds over the last few years, due to it being historically undervalued, yet expensive enough to only have to acquire a modest number of units within a substantial fund, hence reducing management time for the Fund Managers.

“Smaller Fund Managers like Assetz are now focusing their efforts on sourcing smaller properties in undervalued niche sectors and can still provide excellent returns for investors. In many ways, these niche sectors are several years behind the Grade A property returns and we expect an excellent performance over the next few years.”

The minimum level of investment in Commercial Property Fund No.2 is £5,000 for SIPP/SASS investors, with target returns of 15 – 20% per annum compounded. After an initial period of 5 – 7 years, the Fund’s members will decide whether to hold or sell the property portfolio. Introducing IFAs will receive a commission of up to 5% of their client’s investment before any fees rebate they may have agreed.