16th May 2012

Property is a safe investment – Lord Oakeshott

After four years of hardship across the commercial property sector, investors could be forgiven for fleeing in droves from a “cyclical industry” that seems to have a flat tyre. Values have flatlined, tenants are going bust or demanding cut-price rental deals and yields have soared.

It makes for bleak reading, but there is hope on the horizon. Look no further than Liberal Democrat peer Lord Oakeshott who has decided to buy back the property investment company he sold for £10m in 2000.

After selling OLIM Property, the businessman has continued to grow the fund for the Close Brothers Group and today it stands at £146m – up from around £8m in 2000. His decision to buy back the property business is a vote of confidence for the future of alternative investment and demonstrates his belief that he can continue to secure substantial returns from the sector.

In an article for Property Week, Lord Oakeshott outlines the hardships facing the sector but says falling interest rates herald a new dawn for commercial property investors.

In the article, Oakeshott says the previous years have been “a battle between high yields, which are juicier by far than those from equities and bonds, and falling rents.” He adds that investors are also being hit by tenants who are looking to downsize or are just going bust.

Oakeshott also hits out at valuers, arguing they are getting the market wrong. He says they are “there or thereabouts” on yields, but are still overpricing rents. Quite rightly, the peer says that competition in the market at the minute is fierce and every lease renewal or new letting turns into a cocktail of incentives and bargain-basement rent deals.

The property industry is cyclical and we are currently seeing good quality property becoming more scarce – which will help to start drive a recovery. However, lease lengths are shrinking and that is impacting values.

Rental rates lag the economy and Oakeshott claims that we need to see economic growth of around 1.5 per cent a year to stay level in real terms. In the current climate the prospect of empty rates is painful, so landlords are letting at competitive rents rather than holding out for historic headline figures.

That means falling rental values are here to stay for the next 12 months at least unless the economy suddenly rockets back to three per cent growth. However, as Oakeshott adds: “With the banks still
not lending to small business and the credit squeeze getting worse, don’t hold your breath!”

The good news is that inflation is creeping back to the Bank of England target of two per cent and that will stop the squeeze on incomes while also highlighting the benefits of safe property investment.

Lord Oakeshott concludes that if you believe “happy days will be here again soon” there are some exciting opportunities out there. However, he adds that “if, like me, you believe the road to recovery will be long, hard and slow, and have more dips and bumps along the way, then play it safe, stick to solid tenants and realistic rents.”

The reality is that the right property with a decent lease and a tenant with strong covenants is still a safe investment in the current climate. Even without any real rental growth, property will still deliver a decent yield and an initial return of 6 or 7 per cent.

Property prices may yet fall further but with a good location, solid tenants and sensible rents this sort of alternative investment is still an attractive option. As Oakeshott says: “You might well even make some money.”