Increasing appetite for property investment
Now may be the time to get back into property, as experts believe we have reached the bottom of the cycle.
With new funds being launched, and some property vehicles are registering strong inflows, it appears as though the worst is over for commercial property investment.
In August, UK property registered its first rise in more than two years according to Investment Property Databank. The index also recorded a rise a month later in September.
Graham Gould, managing director of Coba Asset Management, says “We’ve now hit the bottom of the cycle or, even if we're not, we're not far from it. Prices have fallen hugely.”
Robert Walters, investment director of property at BDO Stoy Hayward Investment Management, adds: “If you compare autumn 2009 and summer 2007, the yields at which you can acquire property today are the same yields you bought a second-rate property in 2007”
The pair, along with property consultants Strutt and Parker, have now set up a fund to take advantage of the “very strong opportunity” they spy with commercial property.
The UK Strategic Income Property Fund is a close-ended fund with an expected life of seven years. It will invest in industrial property at first, and may add retail and office later.
Walters says: “Recent market data shows a significant improvement in investor sentiment and by focussing on stronger assets it is possible to acquire high quality property with long-dated income to meet the fund's objectives and, therefore, the investors' needs.”
The fund will target a total return of 10%, including an annual distribution of 5% to 6%. It plans to launch with a minimum £25 million and has an annual management charge of 1%. A proportion of the management fees will be donated to housing charity Shelter.
“Some retail commercial property funds are run by quite junior young people,” notes Walters. 'But we have a very experienced team, and partnered with Coba, BDO has launched five property funds before.”
There is a high minimum investment though - £100,000. However, investors can invest via a self-invested personal pension (SIPP), and the firms say they would take investments of £25,000 “in theory”.
Meanwhile, TR Property investment trust has enjoyed some good news over the past few weeks.
Private investors that use the Alliance Trust Savings platform are increasingly buying the trust. It is a new entry in the platform's top 20 investment trusts that investors have bought from 6 July to 5 October. The trust is ranked 17th, up from 30th place in the previous three months.
Iain Scouller, an investment trust analyst at stockbroker Oriel Securities, says: “Investors appear to be looking to some of the trusts that performed badly during the downturn, such as TR Property, to recover going forward.”
Peter Hewitt, director of global equities at F&C Investments, is also a fan of TR Property.
“It has a big dividend reserve and a very well-respected manager – Chris Turner,” he explains. “It has a decent yield of around 4% and will benefit from the closing of big discounts of property securities. I think it will continue to do quite well.”
Over the past year to 1 October, the trust has delivered a 15% return, compared to an sector average loss of 14%.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
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%.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
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).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.