Professional investors and advisers are warming to commercial property because of its attractive yield and respectable returns. With an average yield of 6 per cent, property looks attractively priced relative to cash, equities and bonds.
"Assuming the UK gets on to the road to economic recovery, commercial property assets could experience a positive medium term outlook," says Martin Bamford, managing director at Chartered Financial Planners Informed Choice.
Informed Choice has recently moved to an overweight position in commercial property in its tactical asset allocation model, in contrast to neutral during the second quarter, noting that as well as a reasonably good outlook for total returns it is becoming more useful for diversification and risk management within a diversified portfolio.
"Property assets typically have long leases with upward only rent reviews or in some cases rental uplifts based on Retail Price Index inflation (RPI) thereby adding inflation protection to this income stream," adds Rob Pemberton, investment director at HFM Columbus Asset Management.
And Scottish Widows Investment Partnership continues to forecast a steady improvement with an average annual return of 6.1 per cent per annum from commercial property over the next three years rising to 6.6 per cent over five years.
However, Mr Pemberton only anticipates limited returns in the next 12 months with virtually all the return coming from income and, at best, minimal capital growth. Risks to UK commercial property include pressure from falling consumer spending on retail commercial property, with variable outlooks across the UK regions for all commercial property sectors.
Mr Pemberton suggests IC Top 100 Fund M&G Property Portfolio (GB00B8G9TT83) which yields 3.11 per cent and SWIP Property Trust (GB00B036Z329) which yields 3.37 per cent, as he prefers funds which invest directly in property rather than shares in property companies. This is because the unit price is wholly dependent on the net asset value (NAV) of the underlying portfolio and not related to the direction of the equity market.
An added advantage of M&G Property Portfolio is that it has converted to a Property Authorised Investment Fund structure, meaning it avoids paying 20 per cent corporation tax on its rental income, increasing the yield to investors. Read more on this
Henderson UK Property (GB0007278590) is proving popular with investors because it offers one of the highest yields in the Investment Management Association Property sector with 4.83 per cent, although the fund has made third quartile total returns over one, three and five years.
Among investment trusts, a number trade on very high premiums due to their attractive yields, including IC Top 100 Funds UK Commercial Property (UKCM) and F&C Commercial Property Trust (FCPT), although these have made some of the best longer-term NAV returns. They respectively yield 6.83 and 5.24 per cent, with premiums of 11.43 and 17.17 per cent.
