Time to revisit commercial property?

Commercial property is an investment sector that has largely avoided the recent market volatility.

While the world’s stock markets experienced regular and dizzying bouts of volatility in 2011, UK commercial property returns were very much steadier. At the time of writing, overall returns for 2011 are estimated to be around 8% by the Investment Property Databank (IPD), the property performance measurement company.
The value of investments and income from them can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable guide to future performance.

The secret behind last year’s steady performance is that over three quarters of the return is attributable to rental income. Across the commercial property market as a whole rental levels have held steady, despite the difficult economic conditions. The other component of property returns – capital growth – has almost disappeared. Indeed, commercial property values remain well below their peak levels of June 2007, before the financial crisis hit.

According to the IPD, UK commercial property is attracting interest from a wide range of investors, both based in the UK from and overseas. A recent report suggested that in the City of London over half of all office floor space is now in foreign ownership.

Investment in commercial property is very different from residential buy-to-let. As a general rule, commercial property tenants take long-term leases with regular upward-only rent reviews, and are responsible for the maintenance and insurance of the property. The amount of investment required is markedly different. Whereas the average residential property is worth around £165,000 according to Nationwide, the average value of commercial property in the IPD monthly index is over £9 million.

The high value of investment-grade commercial property means that if you want to invest in this sector, the only practical route is through some form of collective fund. There is now an extensive choice of funds, although some funds with the property label invest in property company shares rather than directly into bricks and mortar. For more details of the underlying strategies of the available funds, please contact us.
A property you invest in can be difficult to sell. It may not be readily accessible, and this may result in delays in acting on instructions to sell.