Global Commerical Property: Why the worst may be yet to come

Around the world, property markets have tumbled. Some investors are jumping back into the market buoyed by talks of recovery and low property prices. Is now the perfect time to buy commercial property or is all the positive talk a smokescreen with the worst yet to come?

After the dotcom crash many investors got their fingers burned. Instead of returning to the stocks and shares market, some investors chose to move their money into property – both commercial and residential – in the hope that their portfolios would be diversified and therefore their risk was lowered. Over the past decade or so, this choice has paid well – property prices have risen and rents have remained strong, meaning excellent ROI for both commercial and residential properties,

However with the recent global problems, as with most assets, property has been hit hard. Property prices have slumped and rents have reduced. Commercial property owners have arguably lost the most – examples of massive price slumps include Boston’s Hancock Tower, a commercial property once valued at $1.3 billion which actually sold for $660 million recently. The Hancock Tower is not a one off either – experts believe that commercial property in America has fallen by around 30%.

But is the worst over? Surely now is a good time to buy – cheap property which is bound to pick up in the medium to long term? According to some, the worst in the commercial property market, has yet to come.

Refinancing debt appears to be the major issue. Many commercial property owners may look to restructure or refinance their debt over the next few years. If the property price has fallen, this means it could be worth significantly less than the value of the mortgage. Some commercial property owners may therefore find that they will be unable to finance and will therefore default on loan payments. With lenders already reeling from the residential property fallout, a commercial property disaster is not something that anyone wants.

But if commercial property prices are low, isn’t now a good time to invest as long as you can hold onto the property for the medium term?

The problem with this is that much commercial property is empty. In Moscow, rents are said to be down around 60 percent and a fifth of all properties are currently lying empty. This pattern is repeated around the world – Hong Kong, Shanghai and Mumbai are all also said to have suffered from falling rents with plenty of offices remaining empty. With large amounts of property staying empty, rents tend to fall as landlords look to fill the space and keep the cash flowing – however the more empty space there is the more competition there is and this usually leads to falling rents.

So if you are prepared to hang on to your commercial property for at least five years or more and have good enough cashflow to afford the property remaining empty for a good proportion of the year, commercial property may well be an excellent long-term bet. As ever, location is key – there are positive signs for commercial property in London and Hong Kong.

However, remember the cautionary tale of Japan: Downturns in the property market tend to last for years rather than months so if you are looking for a quick return on your investment, commercial property, no matter what the country, is probably not the investment for you.

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