Back in March I started to detect signs of optimism amongst commercial property fund managers after a torrid couple of years. Don Jordison and Chris Morrogh at Threadneedle had done better than most during the downturn because they had kept a lot of the fund in cash.
Since then they have been gradually investing more in the market as opportunities have arisen. The fund size now stands at £56m and by mid-October they expect the cash levels to be down to around £10m (unless they get a flood of new investors in the next few weeks).
We at Hargreaves Lansdown have had a negative view on property for many years (in fact with hindsight, our bearish stance started a couple of years too early). However, we have now moved to a more positive stance and believe it is time for investors to reappraise the sector.
Having said that, I do not expect the UK economy to shine over the next 12 months – far from it. I believe we are living in a phoney war at present with none of the politicians willing to tell the truth. This is because the truth is almost too painful to consider; our economy is in dire straits. However, for that reason I expect interest rates to stay extremely low for the foreseeable future and this would be good news for commercial property.
One of the consequences of the crash in the commercial property market is that many yields have now risen to 8%, around double the yield available on government gilts. Only a few years ago it was actually below the gilt yield so that is a rapid change and suggests commercial property could be the cheapest it has been since the 1990’s.
Income is the prime reason to buy commercial property. In fact income accounted for 77% of total returns between 1993 and 2003, and an overwhelming 94% between 1993 and 2009, although there are no guarantees this will happen again. The yield on the Threadneedle UK Property Trust should be about 6.7% (variable and not guaranteed) once it is fully invested.
I think it is fair to say that most of the sellers have now gone from commercial property and liquidity has improved. In fact there might be too much liquidity in property funds, meaning that they could start to have so much cash that it is difficult to buy quality assets at a good price.
I think there is a short term squeeze going on. The beleaguered banks that own huge amounts of commercial property were expected to dump much of this onto the market in order to raise money. However, the banks have behaved rationally for once and are biding their time. This means there is no great supply of property, and with foreign investors attracted to the UK by a weak pound and funds sitting on plenty of cash there could be a rush to invest in commercial property.
The Investment Property Databank (IPD) Index that measures commercial property prices has emerged from a run of 22 consecutive negative months, rising by 1.47% since the end of June. Note, however, that commercial property should not be bought for the short term. I am suggesting that interested investors focus on the long term (by which I mean 5-10 years) and simply dip their toes in the water for now. A diversified portfolio probably shouldn’t have more than about 2.5% to 5% at present in my view although the amount will depend on personal circumstances.
One of the beauties of the Threadneedle fund is that it is quite small, which means it can buy into smaller properties where there is currently greater availability. Larger funds have to find much bigger premises to buy – a harder task. Threadneedle also has one of the sharpest property teams that I have met; I feel confident that Don Jordison and his team’s can not only find good properties but also reliable tenants. I am now moving my stance on the commercial property sector to a tentative buy for the first time in six years and we have added the Threadneedle UK Property Fund to the Wealth 150, our list of favourite funds in each sector.
Commercial property funds are different to shares in a number of ways. Three important points are that property valuations are a matter of opinion, and transaction costs can be high – typically 7%. Finally, the market can be illiquid and in exceptional circumstances this can lead to delays in receiving settlement or even not being able to sell your investment.
Mark Dampier, Head of Research
>> Key Features of the Threadneedle UK Property Fund
Since then they have been gradually investing more in the market as opportunities have arisen. The fund size now stands at £56m and by mid-October they expect the cash levels to be down to around £10m (unless they get a flood of new investors in the next few weeks).
We at Hargreaves Lansdown have had a negative view on property for many years (in fact with hindsight, our bearish stance started a couple of years too early). However, we have now moved to a more positive stance and believe it is time for investors to reappraise the sector.
Having said that, I do not expect the UK economy to shine over the next 12 months – far from it. I believe we are living in a phoney war at present with none of the politicians willing to tell the truth. This is because the truth is almost too painful to consider; our economy is in dire straits. However, for that reason I expect interest rates to stay extremely low for the foreseeable future and this would be good news for commercial property.
One of the consequences of the crash in the commercial property market is that many yields have now risen to 8%, around double the yield available on government gilts. Only a few years ago it was actually below the gilt yield so that is a rapid change and suggests commercial property could be the cheapest it has been since the 1990’s.
Income is the prime reason to buy commercial property. In fact income accounted for 77% of total returns between 1993 and 2003, and an overwhelming 94% between 1993 and 2009, although there are no guarantees this will happen again. The yield on the Threadneedle UK Property Trust should be about 6.7% (variable and not guaranteed) once it is fully invested.
I think it is fair to say that most of the sellers have now gone from commercial property and liquidity has improved. In fact there might be too much liquidity in property funds, meaning that they could start to have so much cash that it is difficult to buy quality assets at a good price.
I think there is a short term squeeze going on. The beleaguered banks that own huge amounts of commercial property were expected to dump much of this onto the market in order to raise money. However, the banks have behaved rationally for once and are biding their time. This means there is no great supply of property, and with foreign investors attracted to the UK by a weak pound and funds sitting on plenty of cash there could be a rush to invest in commercial property.
The Investment Property Databank (IPD) Index that measures commercial property prices has emerged from a run of 22 consecutive negative months, rising by 1.47% since the end of June. Note, however, that commercial property should not be bought for the short term. I am suggesting that interested investors focus on the long term (by which I mean 5-10 years) and simply dip their toes in the water for now. A diversified portfolio probably shouldn’t have more than about 2.5% to 5% at present in my view although the amount will depend on personal circumstances.
One of the beauties of the Threadneedle fund is that it is quite small, which means it can buy into smaller properties where there is currently greater availability. Larger funds have to find much bigger premises to buy – a harder task. Threadneedle also has one of the sharpest property teams that I have met; I feel confident that Don Jordison and his team’s can not only find good properties but also reliable tenants. I am now moving my stance on the commercial property sector to a tentative buy for the first time in six years and we have added the Threadneedle UK Property Fund to the Wealth 150, our list of favourite funds in each sector.
Commercial property funds are different to shares in a number of ways. Three important points are that property valuations are a matter of opinion, and transaction costs can be high – typically 7%. Finally, the market can be illiquid and in exceptional circumstances this can lead to delays in receiving settlement or even not being able to sell your investment.
Mark Dampier, Head of Research
>> Key Features of the Threadneedle UK Property Fund
