15th May 2013
In an investment climate where capital stability is prized and income is at a premium, commercial property would seem like a natural choice for investors. But the boom and bust of 2006-2008 still looms large for many. Yet, expert investors are starting to dip a toe back into commercial property, believing it has become an increasingly compelling alternative to bonds. Cherry Reynard reports.
Bill McQuaker, head of multi-asset at Henderson Global Investors, has just invested in bricks and mortar property for the first time since the crisis. He says: “The yields available on commercial property look attractive. There is also not the same crowding in commercial property as there is in the bond market. If people disengage from bonds and the money comes out, it could be quite painful, but people haven’t gone back into commercial property after the crisis of 2007-2008.”
He has invested in the Henderson UK Property fund, which he describes as a ‘large, conservatively managed fund’ with a good quality of underlying property. He adds: “It is currently yielding 4.5%, which in the context of what else is available, is not bad.”
McQuaker is not alone in seeing the appeal of commercial property. Chris Wyllie, chief investment officer at Iveagh Wealth, has increased the property sector weighting for the Iveagh Wealth fund, also through an investment in the Henderson UK Property fund. He says: “If we get a broad reflationary environment, property will do just fine because you will start to see the growth coming back which has been absent in the property market particularly through the UK,” as he recently told trade website Fundweb.
Although the consensus has remained firm over the past couple of years that only prime property is worthy of interest, such are the pressures on regional high streets and office properties, there are signs that even this is starting to break down. Kames property director David Wise says believes that the secondary market may have hit a turning point. He points to a number of factors: there is a limited supply of prime property, while demand remains high; good secondary properties are now at massive discounts to prime; also, there has been an improvement in the availability of credit with the banks more willing to lend. Government initiatives such as the Funding for Lending Scheme are also giving a boost to the market. He adds: “Q4 2012 marked the low point in the property cycle and we have now reached the turning point for the secondary property market.”
Stephen Elliott, manager of the Royal London Property fund also see some opportunities in the top tier of the secondary property market: “The yield gap between gilts and property is relatively wide from an historic viewpoint and we see scope for this to narrow as investors hunt for yield”, he says. “Having said that, we initially expect that more prime assets will see some yield improvement, whereas secondary assets in poorer locations will continue to slide. There is scope for the better secondary properties to appreciate, particularly in the South East.”
However, he also says that values continued to decline at the weaker end of the secondary market in the first quarter of this year: “Prime stock is holding its value, with more secondary stock losing ground. By sector, the largest fall was in retail at -0.9%.” The retail sector remains fragile, with more tenant failures seen during the quarter: “The better locations have seen administrators sell leases in the market and effectively abandon those units no longer required in the poorer towns and secondary pitches.” This is partly the influence of the internet and partly weaker consumer incomes.
But if investors do want to dip a toe back into commercial property, how should they do it? The expert investors have all plumped for bricks and mortar property funds and yet, on the open-ended side, the top ten funds over the past year have all been property share funds, particularly those with an Asian or global remit. There is no sign that this is changing with three and six month figures also favouring property shares rather than direct property. However, the bricks and mortar funds tend to have a stronger yield and better diversification characteristics, which makes them a more natural alternative to bonds.
The other option for investors is investment trusts. A note from Oriel Securities on TR Property points out, that, in common with the open-ended market, indirect property has been the better performing area of the market over the past one, three and five years, and some trusts still offer value. Analyst Tom Tuite-Dalton says: “Since direct property funds offer a higher headline yield than indirect property funds, they historically enjoyed greater retail demand. Yet such funds offered correspondingly less scope for capital growth. Moreover, a number of such funds came unstuck during the credit crunch due to high leverage and an illiquid underlying portfolio. Many have subsequently missed dividends and most had to cut the level of pay-out on a permanent basis. By contrast TR Property trades on a 13.5% discount and we see scope for further discount narrowing. We find this hard to fathom.”
There are also some punchy yields available, as this piece from Thisismoney points out. The UK Commercial Property trust currently trades with a 7.1% yield. Even with no capital appreciation potential this is attractive.
Bond valuations look vastly inflated, equity markets have seen a lengthy bull run, in contrast commercial property – by virtue of its difficulties during the credit crisis – has been neglected. Yield-hungry investors may find this a safer place to dabble than various parts of the bond market at the moment.