High-rise funds climb nearer to their peak
Jenne Mannion wonders if new investors have left it too late to join the UK office party
Sunday 08 May 2005
ou might spend long hours in the office, but would you consider investing in it?
ou might spend long hours in the office, but would you consider investing in it?
Many ordinary savers who answered "yes" to that question have done rather well out of their decision. Funds investing in commercial property have turned in stellar performances over the past decade, beating shares and bonds hands down. Not surprisingly, they've now become a popular choice among investors.
The funds usually hold a portfolio of commercial property nationwide, ranging from the City of London to regional offices, retail buildings and industrial warehouses - as well as cash and shares in property companies such as Land Securities. They aim for profits from both rental income and capital growth - and since they avoid residential property, they are not at the mercy of fluctuations in the housing market.
Buoyant rental returns of around 7 per cent, rising property prices and a strong economy that has fuelled demand for office space have all helped increase the "yield" of commercial property funds.
A glance at the IPD UK All Property index, which measures returns from the sector, reveals robust growth. In the 10 years to 30 March this year, the average annual return has been 11.3 per cent. Compare this with 8.1 per cent for the FTSE All Share index and 8.54 per cent for government-backed bonds (gilts).
Over the past three years, commercial property has put shares and gilts in an even deeper shade: the index's average annual return has been 13.7 per cent, compared with 2 per cent for the All Share and 6.3 per cent for gilts.
Such is the popularity of these funds that three new ones - from Britannic Asset Management, Scottish Widows and F&C - have been launched in the past 12 months alone.
But a growing number of independent financial advisers (IFAs) believe the asset class is now overvalued and that new investors could be in danger of buying at the top of the market.
"Commercial property used to be seen as the investment cure for all ills - particularly during the bear market in equities four years ago," says Ben Yearsley of IFA Hargreaves Lansdown.
"A lot of people have piled in as a result, but the best returns are likely to be behind us."
Stuart Cowe, property research manager at the fund manager Scottish Widows Investment Partnership, predicts rental yields will hit a 15-year low this year. Nevertheless, he says commercial property will offer an average annual return of 10.5 per cent - "with much of the upside coming from capital growth due to the weight of money chasing property".
New Star's commercial property fund was the manager's top-seller last year. Its marketing director, Rob Page, doesn't believe that any overvaluation of commercial property today would lead to a huge fall in returns. "Previous property crashes were characterised by a huge oversupply of new development," he says. "This is not the case now."
While not everyone is so bullish about commercial property, a stake in such a fund should at least offer investors a degree of stability.
"You'll not see the same big daily movements in property as you would in equities, where the stock market can move up and down quite sharply," explains Mr Yearsley. "Steady returns mean commercial property can provide a good anchor to a diversified portfolio."
That anchor should be a small one, however - no more than 10 per cent of your portfolio, says Mr Yearsley. This figure is still too high for some. For example, Adrian Shandley of IFA Premier Wealth Management recommends 5 per cent.
- 1 I was a Woman Against Feminism too
- 2 Fifty Shades of Grey movie trailer released: First look at Jamie Dornan as Christian Grey
- 3 Is Gideon Levy the most hated man in Israel or just the most heroic?
- 4 Students offered grants if they tweet pro-Israeli propaganda
- 5 The Tory donor whose firm is one of Britain’s biggest tax avoiders - with HMRC's blessing
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...
competitive: Progressive Recruitment: This really is a fantastic chance to joi...
£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
Day In a Page
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar