Property is once more an area of interest for investors.
The latest IMA figures show property was the most popular selling sector in October and November.
According to the Investment Property Databank (IPD) the value of UK commercial property appreciated by 7.4% in Q4 2009 following a series of 25 months of month-on-month capital value declines that ended in July 2009. The peak to trough decline was 44.2%.
Values of both residential and commercial property are being driven up by a lack of available supply. The pull for many investors has been the appeal of strong income returns now offered and the arbitrage which exists between property yields and finance costs. However getting finance and doing so at attractive pricing remains difficult.
The investment fortunes of property require investors to look beyond the headlines as there are some niche sectors that offer attractive investment potential.
The recovery of commercial property has to date primarily focused on prime property, let on long leases to strong tenants.
The lack of prime investment opportunities has led to a rise in interest for secondary stock.
However occupier related risks remain as secondary property typically requires far more active management and tenant default rates are typically higher than with prime property. We believe capital values could fall again as yields stabilise and negative rental growth continues to work through as tenants are now far more likely to negotiate rent freezes or reductions and increased incentive packages at lease renewal time.
Over the medium term market rental growth will be weak and returns linked more closely to the idiosyncrasies of individual properties. One significant headwind comes from banks. They remain major holders of stock and could flood the market as they seek to reduce their property exposure and deleverage their balance sheets. The recent IMA fund sales have been into funds that invest in this area further hardening opportunities to buy prime properties as a result of lack of investable stock.
However, on a sector basis we believe that, as a result of its historically higher yield profile, industrial property will outperform the general property market at least in the short term.
Property investment has always been about stock selection, however this was “forgotten” in the bull markets when “momentum” drove values. Today there is a tactical asset allocation to property once again. The broad market opportunities are mixed and we would encourage investors to consider the stock selection story in property where niche pickings may well be richer than the general market drive for low yielding assets without active management or value added angles.
Nigel Ashfield is managing director, property at Close Asset Management
