Slump in the commercial property market

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by Kay Murchie

A fall in the commercial property market is affecting retail investors and pension schemes with sector funds noting a negative total return not seen since September 1992.

Over the past 18 months, commercial property funds have been one of the best-selling retail investments. However, the majority of the UK’s leading funds have seen their value fall slightly as commercial property prices drop among concerns that the market has become overstated and is due for a slump.

Mark Dampier, head of research at Hargreaves Lansdown, said that a lot of people will be affected by this as it is life funds and the unit trusts that are now declining for the first time in a long while and this will be very worrying for investors.

The largest property owner in the sector, Norwich Union, this week sent a letter to financial advisers this week declaring that the value of property held by its funds dropped 2-3% last month.

Even after rental income had been taken into account, returns were negative in the month for funds such as the flagship £4 billion Norwich Property Trust, the largest of its kind in the UK.
Similar falls in property values were noted by other leading fund managers.

New Star’s £2.1 billion property trust noted a drop of approximately 2% in value in September. Resolution Asset Management’s 8 property funds saw a decline of between 2.5% and 3%.

Investors have poured billions into commercial property and this news signals the end of an exceptional run for commercial property funds.