Posted on 31 Oct 2013

Stat of the Week: Hot Secondary Property


Benefits of improving UK economy are set to spread to regions

With economic optimism rising and Government initiatives such as Help to Buy heating up the property market, real estate companies focused on secondary commercial properties look set to steal the limelight from those targeting the prime market. Total returns from secondary assets in the UK are set to overtake those generated from primary properties from next year says real estate services specialist DTZ. Palace Capital (PCA: AIM) and NewRiver Retail (NRR:AIM) are in prime position to ride this trend.

Secondary properties – that is those in the towns and urban areas – are expected to produce a 5.1% return this year compared to 8.6% for modern prime stock found in the country’s major centres, which usually generate income on long leases. However, from 2014, returns on secondary commercial properties will rise to 12.1%, eclipsing the 10.1% from prime stock, DTZ estimates. Palace Capital has acquired a portfolio of 24 assets spread around the country as part of its strategy to target properties yielding at least 11%.

Investment trust NewRiver focuses on the value end of the retail sector. While it trades on a 10.4% premium to net asset value (NAV) it offers a tempting 6.6% yield and promises progressive dividend payouts with the yield forecast to hit 7.5% in 2016. Fears of a third recession since the financial crisis erupted in 2007 led to a lower appetite for risk and banks taking a more cautious stance with their cash, hitting the secondary property market particularly hard. Now that the prime market is approaching its pre-crash peak and with economic optimism rising, investors may be better off hunting for value in the secondary space. Valuations remain very depressed such that even by 2017 the value of secondary properties are expected to still be a third below their 2006 peak.