A cut above

Commercial property investment funds will give regular players access to big-league returns, says Christopher Browne
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The Independent Online

Welcome to the risk business. It's a common enough refrain for anyone who buys commercial property. However, as lenders and banks up the ante with bigger, more accessible loans and estate agents find better investment targets, it has become less so - and anyone who joins a property club or fund enters an even lower-risk zone.

Welcome to the risk business. It's a common enough refrain for anyone who buys commercial property. However, as lenders and banks up the ante with bigger, more accessible loans and estate agents find better investment targets, it has become less so - and anyone who joins a property club or fund enters an even lower-risk zone.

Investment analyst Roderic Milne, of Surrey's Milbourne Financial Services, says that on a scale of one to 10, investing with a group or unit-trust fund rates a three - compared with five for putting your cash into buy-to-let, seven or eight if you buy your own commercial property and a flying 10 if you trade in foreign equities.

"Buying business properties is more solid than equities as you have the safety net of a 10- to 25-year lease, annual yields [the ratio of rental income to cost price] of 7 to 8 per cent and reasonable immunity against market fluctuations. Trading in equities is highly volatile - you can lose your cash one day and win it all back again the next," he says.

Joining a property investors' club - or indirect investment as it is known - offers a more peaceful life, though it's surprising that whenever you go to a party at least a third of the guests seem to have a neat little buy-to-let tucked away somewhere, while only a tiny minority have a shop or interest in a factory. The reason is that there is very little publicity about commercial investment - unlike buying-to-let.

But all that could change if property investment funds (Pifs) are introduced next year. With Pifs - or Reits (real estate investment trusts) - you can buy into a portfolio of anything from high-street hair salons to multi-storey car-parks and receive 85 to 90 per cent of the rental income - or returns of around 7 to 8 per cent.

"Commercial property has always been seen as a place for big-league players who invest hundreds of thousands of pounds, while Pifs will enable the man in the street to invest with far less risk," says a spokesman for the Royal Institution of Chartered Surveyors (RICS).

The smaller investor currently has few places to put his cash - apart from unit-trust funds. Join a Pif and you will be able to put in as little as £100 and enjoy several tax benefits.

"Pifs have great potential, depending of course on the form they take. As there are more commercial than residential property companies, Pifs could work better with business, retail and industrial holdings, and aided by the UK's current preoccupation with property, give investors higher yields than equities or bonds," says Justin O'Connor, head of business development at FPDSavills.

The RICS has just published a report that shows the number of direct commercial investors rose from 31 per cent in 2002 to 40 per cent in 2003 after poor returns on the stock market.

Investors have also been enticed into this sector after the high returns of buying-to-let as well as falling pension values and low interest rates, the report adds. In the past 10 years, commercial property has given 174 per cent returns compared to 81 per cent for equities - with London office rents recovering after several years of decline. It all bodes well for Pifs, says the RICS.

The path is not entirely rosy, however. One possible downside is that an influx of capital into property could swell the housing bubble and push prices up even further. The other is that if too much Pifs cash goes into new residential developments, it could put off investors who prefer to put their cash into business, retail and industrial holdings, says David Melhuish, senior policy officer at the RICS.

But market optimism and the pressing need for urban regeneration seem to make P-Day likely.

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