Data from the IPD UK Monthly Property index for December shows that UK commercial property produced a return of 10.9 per cent in 2013, which is the strongest annual performance since 2010 and well ahead of the consensus forecast of 8.6 per cent.
Phil Tily, executive director and head of UK and Ireland at IPD, says: “At the start of 2013, few would have expected the year to end with such a flurry – but sentiment has improved drastically along with economic performance. It’s safe to say that 2013 was the year when we saw a marked turnaround in the performance of UK commercial real estate.
“Critically, this has increased confidence in higher yielding and heavily discounted regional assets, that has allowed growth finally to spread out of the capital as investors look for improved income returns and value add opportunities.”
This view seems to be shared by multi-asset managers with many of them starting to become more positive on the asset class.
Rob Burdett, co-head of multi-manager at F&C Investments, notes they are starting the year with a neutral view on property, as while 2013 provided a pretty reasonable return from UK bricks and mortar as a whole “that masks quite a different picture”.
He adds: “You could have done a lot better than that in certain areas of the market and a lot worse if you were in an international property equity portfolio. We like to have a blend of assets within property. We do own a bricks and mortar fund from Swip. It is one of the bigger funds, but it’s got a well-balanced portfolio and never closed its doors to investors in the credit crunch. We think that team will continue to prosper post-merger with Aberdeen.
“But our preference has been for property proxies, so in this regard, we are looking at things like Medix, a listed property company that invests in NHS doctor surgeries. We also have a holding in a listed student accommodation business from GCP.”
Justin Onuekwusi, multi-asset fund manager at Legal & General Investment Management, adds that the fundamentals are very favourable to property at the moment, and therefore, within his multi-index funds he has the highest weighting he can have.
“I prefer direct property over Reits (Real Estate Investment Trusts) because Reits in the short term have a lot of equity risk, however direct property really performs like the underlying actual properties. Economic growth in the UK is actually looking reasonably good and that is always a good backdrop for commercial property.”
Other positive factors cited by Mr Onuekwusi include increased credit availability for people who want to buy property and the valuation case remains strong compared to an asset class such as bonds.
“Price momentum in property is definitely strengthening, you’re starting to see rents rise outside of the prime rental areas like London and, secondly, you’re also starting to see risk appetite improving in the secondary sector. So it is a very useful asset class to have in a multi-asset context.”
David Vickers, senior portfolio manager for Russell Investments’ Multi-Asset Growth Strategy, points out that there are three key things for property, the outlook, valuations and then how you access it, which he suggests “can often be a bigger decision than whether or not to go into property”.
He adds: “Property in the past few years has been the bond proxy, as everyone was getting overly concerned at that stage about bond yields. People were switching into high yield equities, higher corporate credit, but property was a huge beneficiary because it is the closet of all the asset classes to bonds because it has an asset behind it, it has a rental yield and it has yields that are often comparable with government bonds or credit.”
This is demonstrated by the fact property entered the IMA’s top five best-selling sectors in July 2013 for the first time since June 2011, and stayed there in August, September, October and November, reaching net retail sales highs that were last seen in 2010.
However, investors seeking better returns are being pushed up the risk spectrum into secondary properties – those outside London – and beyond.
Mr Vickers explains: “People are forced up the risk spectrum because the returns on prime property are just not very attractive. If 3 per cent doesn’t meet your objective, you either don’t invest and wait or you try and find the return and you find that in higher risk areas. That should bring more than a small tone of caution to investors in what is a very illiquid asset class.”
ADVISER VIEWS
While the fundamentals for property as an asset class seem to be improving, what do advisers think?
Aj Somal, chartered and certified financial planner at Aurora Financial Planning, says:
“Property is an area our clients already invest towards, as part of their diversified portfolios. Commercial property will usually represent roughly 3-5 per cent of a typical client’s portfolio. We would not be looking to increase this proportion for the foreseeable future.”
Joss Harwood, co-director of Eldon Financial Planning, says:
“Our client portfolios include a small element of commercial property via collective funds as a diversifier. We don’t take decisions about which sectors will or won’t do well in any given period; we remain invested throughout in asset allocated portfolios positioned with regards to clients’ tolerance, capacity for, and need for, risk.”
Patrick Connolly, certified financial planner at Chase de Vere, says:
“Property investments continue to face challenging times, with risks of capital losses, some rental yields still falling and an ongoing threat of high vacancy rates. However, sentiment is improving and this has led to investors starting to put money back into commercial property. We have maintained weightings in commercial property, typically accounting for between 5 per cent and 15 per cent of a client’s portfolio.
“However, it is important to understand where a property fund invests. We only recommend commercial property funds which invest in ‘bricks and mortar’ property, as these have far less correlation to the stock market and are less volatile than investing in property shares.”
Carl Lamb, managing director and chartered financial planner at Almary Green, says:
“I think commercial and residential property and land are good asset classes to invest into. In moderation, they bring diversification in to a portfolio plus income via the way of rental yields.”
