Commercial Property: Overcorrection or fair Value  July 24 2010.

(Extract from an article by Westpac economics)
- With an historic average amounting to 76% of total returns,
 income is the main driver of total returns from commercial
 property.
- The recent correction appears to have stabilised yields to 
around long term averages, suggesting a move from over 
priced to fair value.
- Improving economic fundamentals and limited new supply 
should ensure income streams are secure,  with the 
opportunity to value add as markets improve, adding to the 
base yield, and ability to repay commercial finance.

Another measure of where the property market sits would 
be how the current yield sits against its own average, 
ignoring alternative investments. Again while far more 
favourable than a couple of years ago, there is nothing to 
suggest commercial property is under or even overvalued.
 Admittedly offices and industrial are above the average, 
but not by much, while retail is only just below in most 
instances. This again suggests that the markets do not 
appear to have over corrected, but were overpriced in 2007. 
The indicators used suggest that commercial property is 
essentially fair value and hasn’t over corrected, reducing
the risks for commercial finance.
 With improving economic fundamentals and a limited level 
of new supply, in most markets, the position of yields 
either against long term averages or the risk free rate 
should be seen as favourable as the market fundamentals 
should also start to improve. With 76% of the total return 
from commercial property historically coming from the 
income, a position of average in potentially improving 
fundamentals should be seen as a positive with regards 
of being able to generate some value add over the future.