Commercial property is becoming an increasingly popular method of investment, with a new survey demonstrating its expected growth. Aberdeen Asset Management has found that out of 166 UK-based pension funds that it had interviewed, two thirds had exposure to property and 36 per cent were looking to increase their holdings.
The news comes just after Reita-commissioned research found that an increasing number of financial advisors were recommending their clients looked towards commercial property investment to maximise their returns.
So why is commercial property proving to be a popular investment vehicle? According to Andrew Smith, group head of property at Aberdeen, the renewed interest in the sector was a result of investors looking to diversify their assets. And with the property market in the country showing signs of a strong recovery and a lack of new development ensuring that office rental values are remaining stable, it is not surprising that commercial property seems to be a good investment vehicle.
Although prices have not reached the peak values that were seen a few years ago - data released by the Investment Property Databank shows that commercial property prices fell by 45 per cent from June 2007 to July 2009 - the sector has staged a strong recovery in the past ten months, with values rising by 14 per cent.
"The big chunk of capital growth has probably been realised already in commercial property," Paul Guest, of Jones Lang LaSalle, told the Financial Times. "Investors can't be lazy anymore with commercial property … there are really good opportunities for securing safe growing income by picking the right funds," he added.
Speaking to City AM, Mark Callender, head of property research at Schroders, claims that the average yield in the commercial property market is growing - from its current level at 6.5 per cent.
Furthermore, Mr Callender highlights the opportunities that are available for individuals who decide to look outside of the central London market. "Old shopping centres or industrial estates with high vacancy rates might have yields of nine to ten per cent, however, the uncertainty about the economic outlook makes these types of investments more risky," he explains.
Before taking the plunge into a commercial property fund, investors are advised to follow a number of steps, including examining a fund's income streams, looking at the lease expiry profile, the initial yield, the average lease length and the vacancy rate.
While the real estate market in the UK remains a way off the boom years previously experienced, in the recovering sector it is increasingly looking like it could be a worthwhile investment.
The results of both the Reita survey and the Aberdeen Asset Management one suggest that many trusts and financial advisors are looking for more secure places to leave their money and a burgeoning commercial sector could be the place to look.
- Thursday 10 June 2010