The global equities wobble looks set to continue, with the FTSE 100 falling for the eighth consecutive day on 20 August – the longest slide since 2011, and representing a 755 point drop since the record intra-day high of 7122.74 back in April.
On the bonds side, the fact that investors are highlighting high yield as their choice income option illustrates the increasing desperation for yield generators.
For the UK investment community, that need has been feeding into property markets, particularly commercial; investors seeking to capitalise on the ongoing economic recovery have been keeping property funds high in the sales tables for much of 2015.
Mark Callender, Schroders’ head of real estate research, says that while other parts of the UK are starting to see commercial property growth, the London office space remains his core focus.
“There is growth coming through in certain markets,” he said. “It is mainly around the six biggest conurbations, and particularly in Manchester.
“But we are seeing the strongest demand in the central London office market. Vacancy rates of 6-7% are the lowest we have seen for a long time, and that is driving rental growth of around 10%.”
Given that prime London residential property is going for £2,000-3,000 per square foot – against £1,800-2,000 in the commercial space – Callender understands why developers have been leaning towards home building in recent years, but believes that the market is now swinging back the other way.
“While there was a mini-wave in 2014, there has been relatively little office construction coming through and we are just starting to see some momentum,” he said.
“A lot of London sites have been going to high-end residential property in the last few years, but there are now concerns over that market being oversupplied. There is really strong growth and demand coming through from professional services and media companies, and it is making sense to start developing offices again.”
Hot property?
However, Laith Khalaf, senior analyst at Hargreaves Lansdown, issued a caveat to investors looking to buy into the bricks-and-mortar universe.
“Bricks and mortar funds are too expensive and too illiquid,” he said. “Also, if you invest in bricks-and-mortar funds there are a number of headwinds that you will have to battle and investors should think twice before entering that market.
“One is the very high costs of buying and running a property, and you will be paying away a lot of your returns towards costs. There is the liquidity issue as well, and if everyone runs for the door at the same time then investors may not be able to get their funds out as quickly as they might want.”
The past is often the best indicator of what to expect in the future, and Khalaf says that this rule is applicable to the UK property market.
He explained: “If we look back to the financial crisis, there were quite a few property funds that had to ‘gate’ withdrawals, and people were having to wait up to six months to get their money back.
“There is demand, and the property sector has been one of the more popular sectors for some time during the ongoing search for yield. The question is around what happens when that goes into reverse – not only will you possibly have to wait for your money, but you also might not get the price you wanted. It may not totally override reasons for investing, but it needs to be weighed up as part of the equation.
“There are better things to do with your portfolio. If you are looking a diversifier then a total return fund, such as Newton Real Return or Troy Trojan, would be a better option.”
