Take the risk

Although many say the property bubble appears to be slowly deflating, there are those that argue that there is still mileage in sound commercial investment from the right people. With a view to long-term gains and repeat returns, Adrian Kidd from Mintzone explains just why investment in commercial property continues to deliver steady yields, even when the economy appears to be struggling

Commercial Property has had more press than usual recently and for very good reasons. As people have been trying to talk down the residential housing market, so too has the commercial market suffered an aggressive downturn with many investors shunning what was the most popular asset-backed fund choice for the last 3-4 years.

We see this all the time in investment fund markets where a dearth of new funds are launched as players try to get market share. There were only 2-3 of these funds around in 2004 that were good funds, now there are 30-40 of them. From the years 2000 to 2005 some of these funds returned 70 percent more than equities in the UK and 50 percent more than gilts although we should remember the bear market of 2001 to end of 2003. Commercial property was a diversifier away from bonds and stocks and as they started to perform 20 percent returns per annum they hit private investors radars and those of us who wanted to share the ride were probably a little behind the curve. Commercial property has a place in your portfolio but it should not make up a large percentage of where you are invested. As we have seen in the recent volatility globally, well diversified portfolios can still perform but ones that have the old make-up of commercial property, stocks, bonds and some cash will just not cut it in these types of hard times.

However, there are several factors you should consider when looking for the most suitable funds.

Most importantly, you need to know whether a fund invests directly in property or in the shares of property companies, because not all property funds actually invest in bricks and mortar. If you already invest in equities, a property shares fund would increase that risk while giving you little extra diversification, as they have a much bigger link with stock markets than bricks and mortar funds. It is also possible to buy shares directly in property companies, such as British Land or Land Securities. However at the moment this is not a particularly attractive option because investors are effectively taxed twice - the company pays corporation tax on its income and then shareholders pay tax on the dividends.

Funds investing directly in property, however, hold out more promise of a long-term, solid income stream because properties are held over a long time, during which both the rent and the property value increases. This makes it a more reliable investment than shares, although it does mean that the funds are less flexible.

If direct investment in commercial property is what you want, how you invest depends largely on the level of risk that you are happy taking. This is dictated by a handful of factors. Firstly, the risk of a fund largely depends on how diverse it is. For example, many now invest in properties all over the world and benefit from increasing demand in Eastern Europe and Asia in particular.

The volatility of a fund also depends on the type of property it owns. While industrial property is considered a safe bet, retail and office property is more at the mercy of cyclical factors. So, while they will earn the most, they are also the most likely to have a high tenancy turnover.

The lessons to be learnt here is that every market has its ‘fad’ time and we saw this with the technology bubble of 2000. The main difference here though is that at least the commercial property sector is asset-backed whereas the house of cards that was tech was hyped up by imaginary profit and loss accounts that never returned any profits. Buying into commercial property now could prove to be a wise move going forward as long as you are in it for the long term.