Constructing a shares ISA? Try bricks and mortar

As Individual Savings Account deadline looms, Emma Dunkley reports on the property options

Commercial property might not be your first port of call when looking to invest, but some insiders suggest the sector is set to see a turnaround that may mean double-digit returns.

Although last year wasn't exactly stellar for commercial property, with the market as a whole down around 3 per cent, a slight improvement in the global economy this year will put the UK property market back on an uphill track.

Claire Higgins at BNP Paribas expects commercial property returns to come in as high as 8 per cent annually over the next five years. "As the underlying economy and accompanying sentiment improves, so will returns," says Ms Higgins. "By 2015, when the economy reaches above trend growth, commercial property total returns will rise to above 10 per cent."

With the deadline for individual savings accounts (ISAs) fast approaching on 5 April, you might be keen to allocate a portion of your £11,280 stocks and shares allowance to a commercial property fund. Not only can these funds potentially deliver attractive returns, but they can help diversify your investments, so all your eggs aren't in one basket.

"Relative to cash and bonds, the income from property funds looks quite attractive," says Martin Bamford of Informed Choice, the independent financial adviser. "You can get 4-4.5 per cent without aking undue levels of risk – certainly less risk than many equity funds."

There are two main types of fund that give you access to commercial property, such as offices, shops, factories and warehouses. Dubbed "bricks and mortar" funds, these invest most of your money in property, keeping a small amount in cash as a buffer should things take a turn for the worse. The other type is called a property securities fund, and invests in companies involved with property, such as Land Securities.

"The property sector continues to include a lot of different funds, ranging from conventional UK bricks and mortar to exotic overseas property securities," says Mr Bamford. "Property is a fairly catch-all term which can include everything from the reasonably low-risk to the very risky. We consider 'property' to be real property rather than shares in a property or land company."

It is also worth bearing in mind that buying a bricks and mortar fund means you are spreading your investment by owning a different type of asset, whereas the other style of fund means you're building up the amount you have in shares.

"If you build a portfolio, you want investments that do different things," says Tim Cockerill at stockbroker Rowan Dartington. "Bricks and mortar funds tend to do something different to the equity markets."

But even if the outlook for commercial property seems rosy, dark memories from the not-too-distant past still haunt investors, who bought these types of funds and found themselves locked in.

"During the crisis, the bricks and mortar funds closed down to people wanting to cash in – people couldn't take their money out, because if these funds were 90 to 95 per cent invested in buildings, they couldn't sell them to raise cash in order to repay investors," says Mr Cockerill. "Now these funds invest nearer to 80–85 per cent in property and the rest is in cash and short-term debt, in case lots of people want to sell out."

It might be comforting that property funds hold a certain amount in cash, but there's also a fine balance to be struck. "The problem is you have attractive income from property, but holding a large amount in cash dilutes the return," says Henry Lancaster, an investment analyst at Coutts. Although these funds are designed for investors to easily get in and out, he says property is still, fundamentally, tough and expensive to buy and sell.

Even if it's now easier for investors to sell a fund, there are still other issues to face. "If interest rates and inflation go up, people with mortgages could struggle with payments," says Petronella West at Investment Quorum. "Property prices would fall significantly if borrowers get squeezed, as a result of interest rates rising."

There are also property "zombies" on the loose – those property companies that have been left highly indebted following the crash in 2008, which wiped out their capital. Although these companies are seen as riskier than quality prime property, Mr Lancaster argues some could offer opportunities over the long-term, especially as the UK economy improves.

"Investors can afford to wait patiently for capital growth opportunities, as they are being well remunerated with a high income yield, especially relative to traditional sources of income such as cash and bonds," he adds.

However, any further relapse in the UK economy's growth could really hit commercial property. "Funds which hold a high proportion of retail premises could struggle, with several high-profile failures on the high street already this year," says Mr Bamford. "A property fund is only really as strong as the financial strength of its tenants, regardless of the quality of the tenancy agreements and upwards-only rent reviews."

Still, even if economic growth remains sluggish this year, experts believe there are enough factors in place for property returns to improve. "There are early signs the UK will achieve 1 per cent growth this year – but that's enough to make property returns look attractive," says Mr Lancaster.

When deciding how much of your ISA you should have in property funds, Mr Bamford says up to 10 per cent is suitable. "Our preferred property fund is currently Ignis UK Property, managed by George Shaw."

The Ignis fund has returned 12.55 per cent over three years and has had an income of 3.2 per cent, says Mr Bamford. "It has good geographical diversification, with holdings in London, Glasgow and Sevenoaks within the top 10 holdings," he adds. "It offers potential for total returns, mainly driven by income, and low correlation with other mainstream asset classes."

Patrick Connolly, left, at AWD Chase de Vere recommends the M&G Property Portfolio, which is managed by an established team with a long-term, consistent track record. Mr Connolly also likes how the fund invests in quality properties across London and the South-east. "The main focus is capital preservation and any growth from rental income," he adds.

Although these funds are not without their risks, having a small allocation to a commercial property fund, and more specifically, a bricks and mortar one, can diversify your investments and potentially offer growing returns in the coming years.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
Lucerne’s Hotel Château Gütsch, one of the lots in our Homeless Veterans appeal charity auction
charity appeal
Arts and Entertainment
Tony Hughes (James Nesbitt) after his son Olly disappeared on a family holiday in France
tv
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Voices
Jimmy Mubenga died after being restrained on an aircraft by G4S escorts
voicesJonathan Cox: Tragedy of Jimmy Mubenga highlights lack of dignity shown to migrants
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

    £40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

    Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

    £45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

    Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

    $125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Day In a Page

    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas
    La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

    Deaf community outraged by La Famille Bélier

    The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
    10 best high-end laptops

    10 best high-end laptops

    From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
    Susie Wolff: A driving force in battle for equality behind the wheel

    Susie Wolff: A driving force in battle for equality behind the wheel

    The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
    Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

    'No abs Adam' plans to muscle in on Usain Bolt's turf

    After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
    Calls for a military mental health 'quality mark'

    Homeless Veterans campaign

    Expert calls for military mental health 'quality mark'
    Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

    Meet Racton Man

    Analysis shows famous skeleton was a 6ft Bronze Age superman
    Garden Bridge: St Paul’s adds to £175m project’s troubled waters

    Garden Bridge

    St Paul’s adds to £175m project’s troubled waters
    Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

    Stuff your own Christmas mouse ornament

    An evening class in taxidermy with a festive feel
    Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

    Joint Enterprise

    The legal doctrine which critics say has caused hundreds of miscarriages of justice
    Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

    Freud and Eros

    Love, Lust and Longing at the Freud Museum