9th October 2013
Following one of the most spectacular ‘boom and busts’ of recent times investors are once again turning their attention to commercial property funds but are they worth investing in today writes Philip Scott.
There is a brighter glow surrounding most investments right now on the back of the UK’s continued economic recovery, which saw GDP expand by 0.7% in the three months to the end of June. As well as this stockmarkets are up, job numbers have improved and house prices are higher.
M&G Property Portfolio manager Fiona Rowley believes this is all good news for tenant demand. She says: “Given that there has been little speculative development since the financial crisis, this is likely to put upward pressure on rents and, in turn, capital values.”
Bill McQuaker, head of multi-asset investing at Henderson Global Investors believes that by the close of 2013 commercial property may well be one of the big standouts of the year. Up until this year, McQuaker whose portfolios invest in other funds, had not had any commercial property investments since 2005.
He says: “I believe by the close of 2013 commercial property will have been one of the more positive and fresh stories of the year.”
Up until some six years ago, commercial property funds were a huge hit with investors. For many years these portfolios had habitually been delivering double-digit returns and on the back of their strong run, thousands of investors collectively poured millions into these portfolios.
But when the financial crisis hit, performance collapsed, spectacularly so. Between June 2007 and July 2009, commercial property values had plummeted by more than 44%, according to the IPD UK Monthly index – the steepest decline it had endured since its records began.
So bad was the situation that many investors found themselves suddenly locked into funds, as fund managers attempted to stop a Northern Rock style run-on-cash.
Investing in a commercial property fund, as opposed to buying directly it gives investors the opportunity to spread their cash over a wide variety of properties such as retail parks and city office and the rents paid by tenants can provide a stable income.
But in the run up to the crisis, commercial property was all about capital growth while historically it has been an income based asset class, something, which is once again the focus as income-starved consumers struggle to beat the inflation.
McQuaker adds: “Commercial property is providing a decent income stream and some inflation protection, with the average fund yielding circa 6%. We are not anticipating really strong performance in capital growth terms but it does have the potential to make some gains.”
Offices in Central London have already seen a recovery and Rowley expects the rest of the UK to follow, led by demand picking up for office space in the rest of the South East and followed by the ‘big six’ cities of Manchester, Birmingham, Leeds, Bristol, Edinburgh and Glasgow.
Capital values grew on a three-month basis in June 2013 for the first time since October 2011. After bottoming out in late 2012, total returns have been accelerating throughout the year.
Rowley adds: “Even in retail, where rents are currently declining, I anticipate improvement over the next few years. Although the High Street continues to suffer as the sector evolves towards ‘e-retailing’ and retailers rationalise their portfolios, the news is better elsewhere.
“For example, out of town retail parks are taking advantage of the rise of ‘click & collect’ and benefit from free-parking and larger, more profitable stores.”
What funds do experts recommend?
There are essentially two kinds of property fund; those that invest directly in bricks and mortar and those that invest in the shares of property companies.
In terms of performance, while better than they were during the collapse, these funds are someway behind what equities have delivered lately, with the average property fund up 14% over the past five years and 10% over the last three.
For his part Patrick Connolly, head of communications at financial adviser firm Chase de Vere only recommends bricks and mortar, as he believes property shares can be volatile.
He says: “Commercial property funds can provide a steady income stream, and while we are not particularly overly bullish in terms of capital gains, at the time being, investors can be looking at income above the inflation mark.”
Connolly rates Henderson UK Property and the M&G Property Portfolio. The Henderson fund which has investments in areas such as retail parks and hospitals, carries an estimated yield of 4.4%, way ahead of inflation and over the past three years has achieved a return for its investors of 16%. The M&G fund has a lower estimated yield of 2.92% and over the three years is up 8%.
Martin Bamford, managing director at financial adviser Informed Choice, like Connolly prefers those funds that invest directly in property as opposed to shares. He says: “One UK fund that we are watching closely is Royal London Property.”
Launched in 1991, this was the first UK fund to be converted to the new Property Authorised Investment Fund (PAIF) structure, back in May 2010, giving it the advantages of a beneficial tax status and options for improved liquidity. He adds: “It scores quite highly on our quantitative screening process and is a fund we are considering adding to our portfolios in 2014.”
But Bamford’s preferred choice for now is Ignis UK Property, which is also tipped by Connolly. The portfolio boasts a good geographical and industrial diversification across the UK. It is currently yielding 3.5% and up 9% over three years.