The present economic difficulties may have taken their toll on the UK’s commercial property market in recent times; however, some reports suggest that, for many, the lustre of commercial property is returning steadily.
Stories of high street closures, stop-start skyscraper commercial property projects and generally grim-faced politicians talking about recovery and avoiding talk of ‘double dips’ have been regularly populating the commercial property media since the credit crunch first reared its ugly head towards the end of the last decade. Add in the VAT increase, the continued rise in food and fuel prices and the recent riots, and it’s clear even the usual ‘and finally’ stories of a cute cat becoming best friends with a furry hamster have struggled to lift the spirits of many news consumers in the commercial property sector and elsewhere.
Which is why a Financial Times (FT) article headlined ‘Property back in vogue as safe haven asset’ is worthy of free entry, a private booth and a complimentary bottle of champagne courtesy of the commercial property private members’ club.
It finds multi-asset managers ‘are cautiously re-entering the UK property market, focussing principally on investing in prime areas such as London and the South East’. Investments are managed in a range of asset classes. The theory of working in this way stems from acknowledging that an investment manager cannot be successful in all markets all of the time. Employing a fund diversification strategy ensures risks to portfolios are reduced. Investors are realising commercial property fits into this reduced risk category.
Standing at the bar, waiting to be served in the commercial property club, are retail parks and offices. They have received admiring compliments on their assets from City types. One professes a liking for real estate, which he labels ‘a healthy part of a multi-asset portfolio at the moment’. Another reflects on the high-quality commercial property available in the capital, advising potential commercial property suitors that ‘looking for good deals in London is not a bad idea at the moment’. One analyst believes that for commercial property, things look ‘positive. Commercial prices have come back a bit in the last month so it is a good opportunity to add to UK property holdings, but the hotspot is London’.
The attraction of commercial property to multi-asset managers is said to be compounded by the continued unpredictability in equity performance. In August, trading in shares was ‘almost double the same period last year’, according to Reuters. The financial information provider details ‘dramatic spikes in volatility’ in the stock market, compared to the FT’s observation that the commercial property market has ‘seen a rise in returns in the past six months’.
Rental yields are reportedly another inviting feature of commercial property. These are compared favourably to ‘corporate bonds, government bonds, or cash’ by one strategist. He goes on to say that ‘being heavy in commercial property for the last few years has been the right call. It has still performed well compared to volatility in equity markets’.
It’s not only City types who are being drawn towards commercial property. The Pensions World website carries an article focusing on the benefits of investing in environmentally friendly commercial property. The outlined expectation is that: ‘over time, greener buildings will experience higher net income growth (through slower asset depreciation and lower operational costs), be viewed as less risky and, until these factors are fully priced in, deliver higher returns.’
Sustainability is underlined as key to maintaining the cross-generational appeal of commercial property. Pension scheme managers are advised ‘to understand how well placed or “future proofed” their property portfolios are to produce competitive returns in the face of this emerging property market dynamic and the degree to which carbon emissions and other environmental impacts from their property portfolio are being managed on their behalf.’
Another report from Wealth Management UK highlights the longer leases signed by commercial property tenants. Given that ‘a significant proportion of UK commercial property returns are derived from income’, this leads to talk of the stability offered by investing in commercial property. Another advantage listed is ‘diversification’. It is reported that ‘the returns from both equities and gilts are strongly correlated’, whereas ‘commercial property is negatively correlated’. The reduced risk of commercial property returns is underlined as a benefit to ‘more risk-averse investors’.
The tangibility of commercial property is emphasised: ‘some investors have an instinctive preference for an asset that is made of bricks and mortar that can be viewed, visited, or driven past.’
Commercial property’s potential for active management is praised. An example given is that ‘by working with tenants the property manager can pursue initiatives that would enhance the value of the property and generate higher returns.’
The financial performance of residential and commercial property is also analysed. The findings reveal that ‘property has been the best-performing UK asset class over five and ten years, outperforming equities, gilts and cash. Over the last 25 years property has shown an annualised return of over 10%.’
For some of us, a short-term, volatile, unpredictable dalliance can be interesting. Longer term, it seems many are choosing commercial property for a more stable and secure relationship.
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