All days at the office are good for investors in steel and glass
Funds that put our money into business premises have been going up and up. But has the market now reached its peak?
Sunday 01 October 2006
Looming large in Liverpool Street railway station recently has been a poster offering a seductive view of London. Above a night portrait of the City and its iconic skyscrapers - including the Swiss Re tower, more commonly known as the Gherkin, Tower 42 and Canary Wharf - twinkles a panoply of glittering stars.
The glossy ad is not there to highlight the romance of the capital for the benefit of tourists, though. Rather, it's an attempt to convince a domestic audience to invest in the New Star commercial property fund.
Along with other investment companies - including Norwich Union, M&G and Scottish Widows - New Star has been riding a huge wave of interest in these funds, with £2.2bn poured into them since the start of this year, according to the Investment Management Association (IMA).
For individual investors, the returns come from two streams: rental income and increases in the capital value of the buildings themselves. When they put money into a fund, they buy units at a certain price; if the market does well and rents and capital prices stay strong, the price of their units will rise.
And rising is what they've been doing, with strong demand from business for premises across the UK and robust rental levels.
Adding to the excitement has been a flurry of activity over the past couple of weeks: the Gherkin is up for sale with a price tag in the region of £600m, while property tycoon Simon Halabi is selling his £1.8bn portfolio of properties including the Aviva building in the Square Mile.
That said, London landmarks tend to occupy only a fraction of the funds' portfolios, with much of the cash being spent on the more mundane - on factories, retail parks, DIY shops and urban warehouses throughout the country.
One of the incentives for investors in commercial property has been a change in the rules enabling them to buy into these funds using all or part of their tax-free £7,000 allowance for individual savings accounts (ISAs). Another draw has been the continued big gains: like UK house prices, commercial property has surged in recent years and shows no sign of abating.
Over the past five years, the IPD UK All Property index has returned 99 per cent, compared to 60.5 per cent from the FTSE All-Share company index.
Change the period to 10 years and the figures are even more impressive. While the FTSE All-Share has returned 110.8 per cent, that's less than half the 254 per cent notched up by commercial property.
However, some are now wondering whether this hot streak has much further to run. For example, Mr Halabi's property portfolio is thought to be the largest ever to be put up for sale in the UK, and a handful of industry parties have interpreted this as a sign that the market doesn't have much further to rise.
And while the Royal Institute of Chartered Surveyors (Rics) predicts that commercial property returns will hover around 17 per cent this year, it believes they will fall to 9 per cent in 2007.
John Cartwright, the manager of the M&G property fund, says the average yield from rent in the 12 months to August 2006 was 5.6 per cent, down from an average annual yield of 7.3 per cent over the past decade. "In some parts of the country, yields are at their lowest level in 20 years."
Although rents are rising, says Justin Modray of independent financial adviser (IFA) Bestinvest, "they have failed to keep pace with rising property prices - and so yields have dropped."
Tim Cockerill of IFA Rowan is also concerned that, amid the seemingly insatiable appetite for this asset class, some money is more or less sitting idle. "Many of these funds have high levels of cash because they cannot invest it quickly," he says. "That's due to lack of available properties and the slow process of finding good opportunities."
And if a big chunk of money is in cash earning interest at standard bank rates, rather than being invested, it's probably not getting the best possible return.
"Norwich Union Property fund, which is £3bn in size, is currently sitting on nearly £600m. That's 20 per cent cash," says Mr Cockerill.
Mr Cartwright agrees that the availability of attractive property remains limited and well below demand. In the short run, he expects the strong returns to continue; over the longer term, he expects a gentle slowdown.
"History indicates that a gradual adjustment of pricing to a more sustainable level is likely to be how the current boom will end. It doesn't quite imply a spring of hope but nor is it a winter of despair."
Anna Bowes of IFA AWD Chase de Vere says commercial property still has a place in a balanced investment portfolio. "As it is not correlated to shares or bonds, it offers you some diversity and stability."
Depending on your attitude to risk, and on what funds you already hold, commercial property could make up between 5 and 15 per cent of your portfolio, she adds.
AWD Chase de Vere likes M&G Property while Rowan favours Resolution UK Property. Bestinvest recommends New Star Property, Norwich Property and M&G Property.
Will your credit card rewards be scrapped following new EU rules on charges?
Sean O'Grady: 'Hedge your bets on the election - you'll feel much better if you lose'
What would happen if you put a statistician in a casino with £1m?
10 tips for taking out a personal loan
Simon Read: 'The fight must go on over equality on expat pensions'
- 1 I've been called an abusive and dangerous parent, when all I did was listen to my transgender child
- 2 Migrant crisis: Greek soldier saved 20 people singlehandedly off Rhodes beach
- 3 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 4 Company breaks open Apple Watch to discover what it says is 'planned obsolescence'
- 5 Ian Brady: Moors murderer announces his support for Ukip and the SNP
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband
The sickening truth about food banks that the Tories don't want you to know
Migrant boat disaster: Ukip candidate mocks victims in sickening Twitter post
Nigel Farage wants the BBC to stop making programmes like Doctor Who, Strictly Come Dancing, and Top Gear
Global warming: Scientists say temperatures could rise by 6C by 2100 and call for action ahead of UN meeting in Paris
General Election 2015: Britain would become a 'communist dictatorship' under Ed Miliband and Nicola Sturgeon, claims wife of Michael Gove
iJobs Money & Business
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...
£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...
£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...
Day In a Page
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms