High hopes for property sector as Burj Khalifa opens
Jan 16 2010 Personal Finance by Trevor Law
It is only a matter of weeks since Dubai’s highest profile company, Dubai World, said it needed more time to pay back its debts sending stock markets, albeit for a short period, into overdrive once again.
But things are back to “normal” (i.e. extraordinary) in this United Arab Emirate with the newly Burj Khalifa opened, named after the Abu Dhabi president, due to the $10 billion loan to stop Dubai World defaulting on a repayment.
The tower is a multiple record breaker. It stands 828 metres high – which is about twice the size of the Empire State Building, and can be seen from 60 miles away.
It contains the world’s highest mosque on its 158th floor and swimming pool, on the 76th floor, it contains over 1,000 apartments, 49 floors of office space, has a 160 room Giorgio Armani hotel and is served by 57 lifts.
The $1.5 billion tower took six years to complete or, according to one calculation, 22 million man hours! I wonder if the cost of the opening firework display is included in the $1.5 billion? If not, for those of you who saw it, let’s add on a few more dollars!
The building is apparently more than 90 per cent sold. So, does this signify a change of fortunes for the commercial property sector which has suffered massive trouble since the middle of 2007?
Well, in the UK, according to the Investment Management Association (IMA), both October and November in 2009 saw property funds as the most popular retail sector among investors with a net inflow of £416.7 million in November.
Many commentators have made noises (some quieter than others) for a few months now that the commercial property sector will improve – more comments from them later. And, some of these commentators are from the same investment houses and companies that correctly predicted stellar returns for corporate bonds last year.
The second half of 2009 saw a marked turnaround in the performance of many of the major funds in the UK. This was driven by improved investor optimism, increased demand, attractive property valuations, low yields on other assets, especially cash and gilts, and growing confidence that the end of the recession is in sight.
Fund managers have become active in purchasing again. For example the M&G property fund manager, Dermot Kiernan, added two prime retail properties to his portfolio in Islington and Worcester. This house expects continued activity in 2010 and feels that, overall, UK commercial property looks good value.
The head of property at Ignis Asset Management, Gary Hutcheson, is cautiously optimistic about the next 12 months, saying: “We estimate the market to deliver a very respectable total return of eight to 10 per cent over 2010.”
He likes prime properties with strong covenants and long leases and points to significant pent-up demand.
“Estimates suggest there may be approximately £16 billion of institutional, foreign investor and recovery money waiting on the sidelines – and limited stock,” he added.
“The result is a re-pricing of risk at the prime end of the market, increasing the potential for a mini-bubble in the short term.”
Commercial property has always had a proven track-record as a good diversifier.
The collapse of Lehman Brothers, credit crunch and recession saw an almost perfectly correlated meltdown for the major asset classes of equities, fixed interest and commercial property for a sustained period.
