By ADRIAN LOWCOCK 18/11/2009
Lately, there has been an increase in the amount of press the commercial property sector is getting, with professional commentators falling on either side of the debate. As Bestinvest was one of the first to turn positive about the sector, we feel it is our duty to monitor its progress and consider whether there is still time to invest.
Current indicators
Last week, the International Property Databank (IPD) published its monthly report and statistics. October’s figures showed capital growth of 1.9%, an increase on September’s 1.1%, and is the third month in a row that capital values have risen. These figures are supported by the Quarterly Net Asset Value figures of listed property investment companies which have been published over the last few weeks.
Where are the returns in property?
It is important to emphasise that property is an income, not a capital asset. Over the long term it is the growth in rents that is the fundamental driver of capital growth. In October property returned a total of 2.5%, with 0.7% coming from income generation across all sectors (retail, office and industrial). Capital return was more concentrated in the retail sector, at 2.6%, whilst industrial property posted 1.5% return and offices lagging behind at 1.1% but all sectors did show capital growth. See the graph below for historical sector performance, published in the IPD's November Property Index report.
Our opinion
In the current climate, it is difficult to see upward only rent reviews making a strong return and we do not expect strong capital growth in the short term. With capital values down at 1997 levels and early signs that the market is beginning to turn we remain positive about the sector. Whilst the income yields on corporate bonds are still attractive, much of the capital value has now been realised. We are therefore reducing our bond exposure in favour of commercial property where returns are looking more attractive. However, we do add a note of caution; the underlying UK economic fundamentals are not yet healthy and more companies are likely to fall into administration and rent defaults could rise.
Our recommendations
We prefer ‘bricks & mortar’ real estate funds rather than funds of listed property securities, where much of the returns have already been made in the rallying markets. Traditional bricks and mortar funds, such as New Star Property, SWIP Property or M&G Property Portfolio should form the foundation for an investors’ portfolio.
For those interested in accessing geared property exposure (i.e. over 100% exposure to the market) we recommend Invista Foundation Property or ING UK Real Estate Income Trust.
If there is anything you wish to discuss regarding this article please call one of our Advisers on 020 7189 9999.