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

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.

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

A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
Dawkins: 'There’s a very interesting reason why a prince could not turn into a frog – it's statistically too improbable'
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Arts and Entertainment
Life and Style
This month marks the 20th anniversary of the first online sale
techDespite a host of other online auction sites and fierce competition from Amazon, eBay is still the most popular e-commerce site in the UK
Arts and Entertainment
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

    £45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

    Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

    Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

    AIFMD Business Analyst / Consultant - Investment Management

    £450 - £600 per day: Harrington Starr: AIFMD Business Analyst / Consultant - I...

    Business Analyst Solvency II SME (Pillar 1, 2 & 3) Insurance

    £450 - £600 per day: Harrington Starr: Business Analyst Solvency II SME (Pilla...

    Day In a Page

    Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

    We know all too much about the cruelty of Isis – but all too little about who they are

    Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
    Neanderthals lived alongside humans for centuries, latest study shows

    Final resting place of our Neanderthal neighbours revealed

    Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
    Scottish independence: The new Scots who hold fate of the UK in their hands

    The new Scots who hold fate of the UK in their hands

    Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
    Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

    Blight club: Britain's ugliest buildings

    Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
    eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

    eBay's enduring appeal

    The online auction site is still the UK's most popular e-commerce site
    Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

    'Lack of ethnic minority and black faces on TV is weird'

    Culture Minister Ed Vaizey calls for immediate action to address the problem
    Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

    Magic circles: Artist Olafur Eliasson

    Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
    Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

    Josephine Dickinson: 'How I discovered a new world of sound'

    After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
    Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

    Greggs gives lesson in crisis management

    After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
    Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

    Matthew McConaughey sings the praises of bumbags

    Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
    7 best quadcopters and drones

    Flying fun: 7 best quadcopters and drones

    From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    Joey Barton: ‘I’ve been guilty of getting a bit irate’

    The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
    Andy Murray: I quit while I’m ahead too often

    Andy Murray: I quit while I’m ahead too often

    British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
    Ferguson: In the heartlands of America, a descent into madness

    A descent into madness in America's heartlands

    David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
    BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

    BBC faces corruption allegation over its Sir Cliff police raid coverage

    Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home