Constructing a shares ISA? Try bricks and mortar
As Individual Savings Account deadline looms, Emma Dunkley reports on the property options
Sunday 24 February 2013
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.
Will your credit card rewards be scrapped following new EU rules on charges?
Bargain Hunter: First Utility's Cosy deal lets you heat your home from anywhere
What would happen if you put a statistician in a casino with £1m?
Simon Read: 'The fight must go on over equality on expat pensions'
Pension freedoms: How to deal with cold calls from scammers
- 1 Bruce Jenner's 'Interview of the year': Suicidal thoughts, rejection by family members and new wardrobe
- 2 Sofyen Belamouadden murder: The inside story of a crime that horrified Britain
- 3 How to turn off/stop 'seen by' on Facebook: Disable it to make your chats seem less passive aggressive
- 4 'We're not heroes, just tourists': Swedish police officers on holiday stop vicious assault on New York subway
- 5 Buckingham Palace guard who attacked passers-by in 'most most violent piece of CCTV footage' police officer had seen walks free
The sickening truth about food banks that the Tories don't want you to know
Katie Hopkins on LBC: Listen to caller taking The Sun columnist to task over migrant comments
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
£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...
£22000 - £24000 per annum: Recruitment Genius: This is an opportunity to join ...
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