Falling swap rate creates commercial property opportunity

Tritax, which manages over £2bn of commercial property, says that the cost of finance has dropped at a rate that offers the greatest opportunity for commercial property borrowing since before the 2007 property crash. In return, this can mean possible income yields of 8% per annum for investors.

The fixed cost SWAP rate has been in almost continuous retreat since the start of 2010, falling from circa 3.3% to 2.2%. This decline means that investors may now pay a total cost of debt of 4.5% compared to approximately 6% a year ago.

Anthony Wyld, head of marketing at Tritax, comments:

“As commercial property values are still far from their peak of mid 2007, premium calibre property with a strong tenant can be found offering rental income yields of circa 6.5% - 7%.

"If that purchase is made using circa 65% debt then it would be possible to distribute around 8% per annum to investors even after allowing for an element of debt repayment over the investment term – an attractive yield compared currently to bonds or equities and one with relatively modest risk.”

“A comparison of the present situation with Tritax’s 2009 funds is illuminating: The InterContinental Headquarters building was acquired at a yield of 7.85%, which after a 5.9% cost of debt, left a margin of 1.95%. For Brindleyplace 7, 8 & 10, the yield was 7.16% and the all in debt cost was 5.6%, leaving a margin of 1.56%.

"Today, a provincial office with a strong tenant on a lease with circa 15 years might be bought on a yield of circa 6.75%, which after a cost of debt of 4.5%, leaves a margin of 2.2%.