COMMERCIAL property is back in fashion. A recent survey by Aberdeen Asset Management found that UK pension funds are actively looking to increase their commercial property exposure. It found that out of the 166 pension funds it interviewed, two thirds had exposure to property and 36 per cent of those said they would increase their holdings. Out of the pension funds that weren’t invested in property, 35 per cent said they were actively considering making an investment.
So what makes property so attractive for institutions? According to John Danes, head of UK research and investment strategy at Aberdeen Asset Management, there are two reasons for this. Firstly, property prices have started to rise again, although at a more sustainable rate than before the crisis. Data from the Investment Property Databank (IPD) shows that commercial property prices fell by 45 per cent from June 2007 to July 2009. However, prices have staged a recovery in the past 10 months and have risen by 14 per cent.
The second factor is yields. Mark Callender, head of property research at Schroders, says that the average yield in the commercial property market in the UK is rising and is currently at 6.5 per cent. Even when you subtract inflation, currently 3.7 per cent, commercial property is still yielding 2.8 per cent, which is superior to the nominal yield on 10-year gilts, which is 3.47 per cent.
Some sections of the market are more attractive than others, says Callender. He favours second-tier commercial property, for example shopping centres or office blocks located in affluent areas, rather than prime property in the City of London, which he says is starting to look overpriced. He says that the tertiary sector is looking less attractive. “Old shopping centres or industrial estates with high vacancy rates might have yields of 9-10 per cent, however, the uncertainty about the economic outlook makes these types of investments more risky.”
It can also be worth looking outside of the UK for opportunities, says Jesper Dambourg, chief executive officer of Saxo Properties, a property investment fund. He says there are attractive opportunities in central Copenhagen, where distressed assets are still selling at a large discount, and he also favours the Swedish market.
Property can pay off. Schroders West London Property Unit Trust, which is focused on central London office space, has an average return of 7.9 per cent over five years. It’s also possible to invest in property funds through equity investments. Aberdeen Property A Share, a £200m fund that invests in property company securities, has returned nearly 20 per cent in the last 12 months.
The property sector remains far from healthy, but it is looking like an increasingly attractive addition to a portfolio.