Is now the time to invest in commercial property?
Is it time to consider investing in commercial property again? There are early signs that it could be. In August 2009, UK property registered its first rise in more than two years according to Investment Property Databank (IPD), which produces the benchmark indices for the industry.
There has been a rash of new launches, including a number of recovery funds, from property managers who were confident the market was close to the bottom. And most of the retail funds have lifted the restrictions they had imposed to prevent private investors stampeding for the exit.
Those who bought into the sector when it was racing ahead three years ago could be forgiven for not wanting to get involved again. Property values have plunged by 44% over the past two years; a far steeper and faster fall than was seen during the previous slump at the start of the 1990s, when it took nearly four years for values to fall 27%.
Some of the most popular funds have fared even worse: the New Star International Property fund, launched with great fanfare in June 2007, has lost 41% of its value in the past year - and investors have been locked in while it tries to sell enough assets to meet demand for redemptions.
The UK version is still open, but has lost almost 40% over the past three years.
Funds from the big three in the sector - M&G, Aviva and Scottish Widows Investment Partnership (SWIP) - have all lost around 30% over the same period. That is considerably worse than equities or bonds.
The scale of the fall is one reason for buying into the property sector now. Another reason is that the dramatic fall in the market has pushed up the yield on property sharply to an average of nearly 8%, according to IPD, which translates into yields of 5% or 6% on many of the bigger retail funds.
That is attractive compared with stockmarket investment yields of little more than 3% and bank interest rates of close to zero.
Gerry Ferguson, head of UK property at SWIP, says his fund has invested £160 million over the past three months and wants to invest more. Other investment funds are also buying and the weak pound is attracting foreign investors.
Tim Cockerill, head of research at Rowan & Co, thinks it is time to consider investing in property, particularly over five years. "You can easily get a yield of 5% on a fund such as Aviva Property Trust, and can be reasonably sure of rental growth on the fund and that property values will rise." He is keen on Aviva's fund and the M&G Property Portfolio.
Ben Yearsley, investment manager at Hargreaves Lansdown, thinks property values are close to the bottom, but that investors needn't rush in. While equity markets can bounce 20% in just weeks, the property market takes much longer to move, so investors shouldn"t worry about missing the upturn.
This article was originally published in Money Observer - Moneywise's sister publication - in November 2009
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The managers of these funds look for shares in companies that have fallen in price and popularity for reasons such as operational difficulties, management changes or financial over-extension, are unloved by the market but have the potential to recover over the long term. Managers of recovery funds focus on buying these undervalued companies where they see significant potential that should lead to a turnaround in their fortunes, a renewed appreciation by the market and that recovery will be reflected in the share price.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.