The lights go on again in commercial property
The market is picking up after the economic darkness of the past two years, but there are still risks
Sunday 05 September 2010
A year of positive returns has helped to encourage some nerveless investors to return to the UK commercial property market.
A 16.9 per cent rise in the UK quarterly property index produced by Independent Property Databank since last September is just the headline figure behind which we've seen 12 months of rental growth and rising yields from office, retail and commercial property.
Return-hungry investors have spotted the growth and moved back into commercial property funds, after a mass exit in 2008 and 2009. The most recent figures from the Investment Management Association show that the commercial property sector was the third most popular with investors in June, jumping from seventh the previous month. However, while commercial property funds have delivered an average return of 10.83 per cent over the past 12 months, wind the clock back further and you see that over three years more than 26 per cent has been wiped off the value of these funds.
That raises fears that investors flocking to such funds now could be in for another nasty shock. Financial advisers are one group turning against the sector. According to a study from Reita, an organisation that actually promotes property investment, advisers now fear a fall in commercial property prices. Almost a quarter – 24 per cent – of advisers believe that prices will fall, compared with 6 per cent in January.
Is their concern well placed? "They reflect justifiable uncertainty about the economy over the next year or two, mainly in the light of public sector cuts," says Reita chairman Patrick Sumner. "Recent news of falling house prices exacerbates these concerns, but there are big regional and sectoral differences. We are in the early stages of a slow economic and commercial property market recovery, in the course of which there will be the odd lurch. But shares, in my view, are trading at the cheaper end of fair value, and dividends are sustainable."
Barry MacLennan, the investment director of property products at Standard Life Investments, runs a number of commercial property funds. He agrees that there are differences. "The recovery so far has been uneven. Central London office markets have pulled away like a train and are very strong, but elsewhere things don't look that great," he says. "Retail property hasn't been the easiest environment in the past two years and there's been a huge divergence of experience."
He concentrates on good-quality investment opportunities, rather than speculating on opportunistic, potentially high-growth investments. For instance, a new shopping centre due to open in the Olympic 2012 site in Stratford, east London, next year already has 65 per cent of its space pre-let, meaning it's likely to prove to be a reliable investment. Other shopping centres coming in the next couple of years could remain largely empty.
In other words, it's essential to do your homework before investing. Mr MacLennan thinks it can be a wise move, especially for those approaching retirement, but even then he cautions that commercial property should not represent more than about 15-20 per cent of an investor's portfolio.
The rise and falls in recent years shouldn't make that much difference to your approach to the sector. In the past decade the sector boomed as property development grew. It prompted an investor move into commercial property in the mid-1990s which almost reached gold rush proportions before the bubble burst in 2007. But the recent recovery and popularity of the sector could lead to a second wave of over-investment by ordinary investors.
That's the danger, says independent financial adviser Philippa Gee, the managing director of Philippa Gee Wealth Management. "The problem with commercial property is that it is treated like a fad investment, so people either believe it should be avoided at all costs or they should pile the majority of their money in," she says. "Indeed, I have come across financial advisers who share that belief and have suggested their clients invest 100 per cent of their portfolio accordingly, which is shameful, to say the least."
She suggests investors should consider having 5 per cent of their portfolio invested in commercial property. Danny Cox of adviser Hargreaves Lansdown agrees. "Property funds can be used an alternative to fixed interest in a portfolio as an income bearing asset," he says. However, he warns that they can be a little more expensive than fixed interest funds. "That's because the transaction costs of a property are high," Mr Cox explains.
In the past there have been liquidity issues, leaving investors sometimes unable to get at their cash. "Property fund managers reserve the right to delay encashments if they wish," says Mr Cox. "This is to prevent a manager being forced to sell a property at the wrong price during a downturn. These liquidity issues have been prominent in the sector since market falls in early 2007, though most funds are now running normally."
"I would suggest no more than 10 per cent of a portfolio, with the more adventurous having less exposure," says Adrian Lowcock, a senior investment adviser at Bestinvest. He favours accessing the sector through managed funds. "You do not pay a premium on the assets and do not need the large sums of money required to invest directly in property," he points out. "The fund managers look after all the paperwork, legal side and collect the rents."
Martin Bamford, managing director of advisers Informed Choice, remains a fan of the sector. "I accept that the prospect for stellar returns over the next 12 months does not seem likely. However, while valuations are not as attractive as they were last summer, the downside risk is limited by virtue of the losses already experienced," he says. He advises investors to limit exposure to 20 per cent of a portfolio and invest only for the long term.
Funds recommended are Henderson UK Property and SWIP Property Trust by Mr Lowcock. "Both have over 10 per cent currently held in cash, which means that liquidity shouldn't be too much of an issue," he says. Mr Cox picks Threadneedles Property Fund. "It's run by Don Jordison, one of the best managers in this sector," he says. "At times he shifts large parts of his portfolio to cash to protect investors from the downsides."
Philippa Gee, Wealth Management
"Commercial property should be a part of an overall portfolio for investors who are willing to take a degree of risk. So perhaps it is not for the most cautious investors, but it is worth being considered by those with higher risk tolerances. It can help to give a well-balanced portfolio, to help investors work through different investment climates and should work best when set up alongside cash, bonds, equities and commodities."
- 1 Tunisia hotel attack: Locals form 'human shield' to protect hotel from gunman Seifeddine Rezgui
- 2 Iain Duncan Smith's expenses credit card is suspended after he runs up £1,000 debt to taxpayer
- 3 German ethics council calls for incest between siblings to be legalised by Government
- 4 French woman dies in freak bungee jumping accident
- 5 Jennifer Garner and Ben Affleck to divorce and end their 10-year marriage
The moment a Queen's Guard soldier lost it and drew his gun at annoying tourist
Greece crisis: IMF was pushed around by Angela Merkel and Nicholas Sarkozy – and now it is being humiliated
Greece crisis: The wider lesson is that it’s time to abandon this failed experiment in currencies
'I wish the BBC would stop calling it Islamic State' – David Cameron unleashes frustration at broadcaster
They are neither a 'state' nor 'Islamic': Why we shouldn't call them Isis, Isil or IS
Tunisia beach attack: How can British Muslims respond to the latest outrages?
iJobs Money & Business
£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...
£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....
£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...
£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...
Day In a Page
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
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.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
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 six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
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.
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.
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 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.