Many investors of commercial property were hit by the news that their investments had dropped by around 5% in value. Even though this drop was not as bad as feared for those who held assets in large commercial property funds, it was more about the fund management groups changing the way in which the units had been priced.
This was down to the fact the sales numbers had risen and this could lead to the costs of running the fund decreasing by a disproportionate amount on those investors who were still part of the group.
Many investors would feel like the rules have changed and would have been changed to stop them from selling. Experts believe that things are not as bad as they were in 2007 but many say that things could get better for those looking to be involved.
Over the last three years things have been great. Demand has been high and investment has been flooding in but in 2015 sales took a downturn and the money began to dry up and this meant that unit prices had to be recalculated.
Essentially, units have two pieces, the first is an offer price that buyers are asked to pay and the second price is the bid price that sellers are eligible to receive. The difference highlights the cost that is linked to both selling and buying and those assets that can be bought and sold easily the difference is negligible. In those assets that are not so easy to buy and sell the difference is larger. At those times when the process of buying and selling is balanced, it is possible for all to trade units at the higher offer price.
When things become different and the flow becomes negative, those who are still in the fund have to deal with the burden that comes with selling any assets and this means that those who want to sell, do so at a lower price in an attempt to balance things out once again.
What has changed?
Commercial property does offer a steady income but investors have now been given a lot more from increasing prices. However, this has been slowing down and this was expected. In recent years they have been benefitting from the increasing capital growth so many are looking to release their profits now.
Are other funds likely to do the same?
Currently, a number of property funds have opted to leave their pricing unchanged. In London, prices have been strained and this has led to people taking profits. The Brexit could be a concern for overseas investors of which London relies on. Those funds that carry a greater weight beyond the boundaries of inner-London are not experiencing the same outflows with many still seeing encouraging inflows.
Experts believe that a re-run of 2007 is unlikely as the situation looks a lot different. Investors are cautious when purchasing commercial property as lenders have tighter rules and that makes the default of rent less likely.
Is now the time to buy?
This alteration in pricing does mean that those who are considering buying now are likely to receive improved terms. This is going against those that believe that things are slowing down but for those looking to purchase for income, where rent and demand is there then things can only look good. Following the referendum, if things calm down then things could balance out and this could lead to funding groups increasing the value of those units that were purchased at a lower price.
Fletcher Day are a commercial law firm based in London, with a team who specialise in commercial property law who can advise on acquisitions, real estate financing, licensing regulations and landlord and tenant matters.