For investors, residential property is less interesting as they believe that their clients already have a substantial exposure to house prices through their own home. Therefore exposure to the housing market is mainly through commercial property, for diversification purposes.
When it comes to the commercial sector, property is attractive in the longer term for some investors. Others are more sceptical and consider the sector a ‘last port of call’ for diversification.
“When it comes to property, the key things to watch out for are liquidity, income and transaction costs. Capital value movement tends to be noise, and rent is not a main driver” Don Jordison, managing director of Threadneedle Property Investments, said.
After spending his ‘whole life studying property’, Jordinson has found he is able to summarise the inner workings of the sector in one sentence:
“Look at the flows into the sector to find out where it’s going. If everyone is selling then no one is buying. Equally, if everyone is buying, then no one is selling.”
In his opinion, the outlook for property in the short to medium term is good, after which some backtracking is expected. He is keen on investing outside of London, which commands an automatic premium, and prefers to invest the £6.8bn of the firm’s property investment sum around the UK.
However, he throws up the question of longevity in the current situation.
“A bulge of demand is coming through, but how long will it last? It will be affected by any setbacks in global confidence, for example from Europe. To get the benefit of income, you need to own property for a long time.”
How do you invest in it?
Last year, the UK’s commercial property market saw over £53bn worth of deals go through, with about half of this bought by non-UK investors.
The question of how to access the market is a core problem for investors. Buyers control the price, so when the property market first started falling in the financial crisis, those who bought into property via funds often found they were not able to get their cash back. With the economy crawling out of the crisis, property funds are now trading at a premium.
According to Adrian Lowcock, senior investment manager at Hargreaves Lansdown, an investment trust is the better way to go when dealing with property.
"The sector remains highly volatile and risky, and investors should consider carefully the role of property as a diversifier," he says.
A good diversifier
James de Bunsen, multi-asset fund manager at Henderson Global Investors, started investing in UK commercial property about 12 months ago, across the firm’s multi-asset portfolios.
“It's been a successful position, exceeding our total return expectations as capital returns have been stronger than we anticipated. We continue to like it as an asset class, primarily as it still offers an attractive yield relative to government and investment grade bonds, and it is a good diversifier in a portfolio context,” he said.
He added that choosing an appropriate vehicle is very important: he primarily invests in the Henderson UK Property Trust which pays a yield of 4.2%.
Selective exposure
While investors are not flocking to the sector, it does offer scope for diversification. The UK housing market remains a key economic variable that is closely monitored by investors. There is a strong correlation between the sector and the domestic UK market, and the strength of the sector is still concentrated in London and the Southeast. With elections in the not-to-distant future, it is unlikely that the Tories will do anything to hugely impact the market. In the longer term, commercial property could offer attractive yields to those willing to accept the associated risks.
