As you are aware the residential market is, we beleive, on a temporary hold. On the other hand commercial property continues to go from strength to strength.
This has partly been created by huge investor demand. There are still many people who have lost faith in equities (Shares). Nobody likes to see their funds decrease in value. For low to medium risk investors, the main attraction of commercial properties is that there is less volatility than equities and it provides a secure income stream that comes from having high quality tenants on long leases.
There are a number of routes into commercial property investment - personally in your own name, using a company, using professionally run Property Funds, property company shares or through a Self Invested Personal Pension (SIPP). We are primarily concerned with investing in Property Funds which invest directly in property rather than purchasing property company shares. I will come back to SIPPS in a moment.
Commercial property's strong investment has continued in recent months. As measured by the IPD monthly index, property gave a total return of 7.3% for the six months to the end of June 2005. This compares to total returns of 8.2% for UK Equities and 4.6% for Gilts over the same period. Property's strong performance continues to be driven by capital growth. This is despite a modest strength of underlying demand. In other words it is investor demand which is keeping the market going forward.
Has the market perhaps peaked? Possibly but property offers low to medium risk investors a much more stable investment than equities. We do not believe funds should purely be restricted to property investment. For the larger portfolio it does provide a very good balance and spread of risk. Currently the retail market is suffering a downturn and this will help to moderate retailer demand and rent growth in coming years. Office recovery in Central London continues with vacancy rates reducing. Industrial rents are edging higher but the sector has started to slow in line with the slow down in retail activity. And the longer term outlook? Over the next few years the general view is that returns will be in the 7-8% per annum rather than approximately 13% achieved over the last three years.
We have seen significant interest shown by investors over the last few years for the property asset class. Take up of SIPPs - Self Invested Personal Pensions continues unabated. Interestingly our experience is that they are not solely interested in buying individual properties for own occupancy but many prefer the spread which is available from professionally run funds through insurance companies. They can offer a far wider spread in the funds between retail, offices, industrial, retail warehouses, office parks and hotels. Few individuals can purchase more than one or two properties. This ups the risk considerably. The Inland Revenue restriction for borrowing via SIPPs after 6th April 2006 will be restricted to 50% of pension savings. Currently you can borrow up to 75% of the buildings value.
The Olympic Games bid for 2012 has recently been in the news. Interestingly I read an article by Morley Fund Management which surprised me. The construction costs of venues and the athletes' villages are c. £1.2 billion. This will take place over six years implying a spend of c.£200 million per annum. This is very small when compared with the average annual construction orders in London over recent years of c. £5.5 billion, construction costs of Terminal 5 at Heathrow of £3.75 billion and Crossrail of £7-11 billion. The direct impact of money spent on the Olympics will be small. Also 500,000 visitors are expected for the sixteen-day games. This compares with 13.4m overseas nights in 2004.It may even put some visitors off.
Article written by Jeremy Beachell |
