Strong tailwinds lift property sector

This article is part of
Investing in Property - May 2015

Real estate investment is seen by some as an alternative asset class for diversification; for others as an income play or boring staple of investment portfolios.

So where are the property hotspots?

The UK property market has been a clear beneficiary of the improving economic picture with the Investment Property Databank (IPD) UK All Property index showing a rise of 62.54 per cent for the five years to April 30 2015, with the UK Office sector delivering the best performance within that of 83.33 per cent.

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On a global basis the FTSE 350 Real Estate Investment Trusts index is the clear leader for the five-year period to April 30. Its rise of 140.72 per cent outstrips the Euronext IEIF Real Estate Investment Trusts Europe index, which rose 102.35 per cent, while the Dow Jones US Select Real Estate Investment Trusts index slips into third place with an increase of 77.97 per cent.

So what is making the UK an interesting property opportunity and, more importantly, can it last?

Don Jordison, managing director, property at Columbia Threadneedle, suggests parts of Europe are probably at various points behind the UK in the recovery of their property markets.

He explains: “The UK was the distressed turnaround story two years ago; it isn’t anymore. If you look at the UK I have never seen so many tailwinds for the sector. The economic cycle is supportive, the interest rate cycle is supportive, [and] the supply of vacant and new property is low so that’s supportive. Even the political cycle is supportive.”

Elsewhere, the weaker euro could potentially be attracting more investors from abroad who see the European property market as a potential ‘safe haven’ with reasonable yields.

For example, the latest figures for the IPD German Monthly Open Ended Funds Index show an annualised one-year total return of 2.6 per cent to April 30, while the IPD Netherlands Quarterly Property Index records an annualised total return for the 12 months to April 30 of 5.2 per cent.

But property is not just on the radars of UK and European investors. In Japan, the IPD Japan Monthly Property index recorded a total return for the 12 months to the end of January 2015 of 8 per cent. Meanwhile the Mercer/IPD Australia Monthly Property Fund index recorded a 9.5 per cent total return (post fees) for the 12 months to April 30.

Of course, the more money real estate attracts, the more concerns are raised about fair pricing and longevity, with the Investment Association figures showing property was the most popular asset class in March for the third month in a row with £294m of net retail sales.

“The sector has done the thick end of 15-20 per cent for two years which has in the past always been a bit of a lead indicator for trouble to come,” says Mr Jordison.

While the short-term outlook remains positive, looking further ahead he points out the obvious development will be an increase in the supply of stock that will lower prices.