Has commercial property turned a corner?

Property has often been considered an attractive alternative to the traditional asset classes, historically delivering higher returns than cash and bonds whilst being less volatile than equities.

Has commercial property turned a corner?

In addition it can provide an element of inflation protection and importantly provides diversification due to its low correlation with gilts and equities.

While this cannot be guaranteed in the future and over short time periods, these characteristics have stimulated a renewed interest in this part of the investment market.

Property’s income role in an investor’s portfolio

The tangible nature of property is appealing to investors; they can visit an office, shop or bar they invest in and can see the on-going operations underpinning their income return.

This income is often the main driver of performance but an asset can also offer the prospect of some capital growth.

Over the past ten years, property has delivered an annual income return of 6.5%* for investors, according to the IPD Monthly Index, and 6.9%* over the past year.

This is very attractive to income seeking investors in an era of low interest rates and the income stream has been remarkably stable over time.

Relatively commercial property’s income return at 6.9% is a significant 4.8 percentage point premium to gilts, 2.8 against bonds and 3.4 against equities*.

Investors looking to reduce risk in their portfolio could find an allocation to property can help and in our next article we will be covering the low correlation with equities and bonds and its inflation hedging characteristics in further detail.

Capital positioning versus other asset classes

While many markets are approaching, or are at, their previous peak, IPD data shows that property capital values are still approximately 37% below their 2007 peak.

After 18 months of marginal capital value falls in property it appears we are at an inflection point for capital values with signs of growth coming from various areas of the market.

This indicates that the property investment market could now be at an attractive entry point for investors.

Outlook for property

We are forecasting an increasing and sustained improvement in returns over the medium-term. With the UK economy and business environment showing signs of recovery, credit conditions improving and further quantitative easing a possibility.

On consensus estimates the UK economy is projected to show sustained GDP growth with 2012 marking the cyclical low point, boosting business activity and, in turn, supporting occupier demand at a time when new supply has been muted.

According to the latest RICS Commercial Property Survey, tenant demand has turned positive on balance, while Knight Frank, GVA, EGi and JLL have reported increased take-up in the regional office markets.

While London may have recently grabbed the headlines for increasing values, the gap between the capital and the regions is narrowing.

Sentiment towards property has improved for a variety of reasons and we believe that taken together present a compelling case for investors to consider increasing their allocation to UK commercial property.

*As at 31/5/2013

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Tags: AIC, Commodities

About Author

Guy Glover

Guy Glover is fund manager of the F&C UK Property Fund. Guy has over 21 years’ experience in property. He has been with F&C REIT for nine years and previously with Wereldhave for nine years. Guy has experience across all market sectors with recent focus on central London where he delivered an impressive track record. Since 2010 Guy’s main role has been establishing and expanding this fund. Guy is a Chartered Surveyor and holds a Bachelors Degree in Land Management and a Post Graduate Diploma in Property Investment.