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.

Once burned

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