In reality, we have learnt that property is an emotive subject and it is deemed imperative to have an opinion. Therefore, to reduce the claims of idleness, we have updated our view to negative.
I've got no strong bias on UK commercial property. Well, that's not totally true: I am vehemently against the illiquidity of bricks and mortar funds and their swingeing fees. Memories of 2007 and the gated funds loom large in my memory and I have seen little to suggest that the inherently illiquid nature of UK property funds has ameliorated.
Performance of sector 2007 to 2010
Source: FE Analytics
On the fees front, I think it is insane that investors should be forced to shell out for AMCs, ongoing charges, transaction fees and taxes for the privilege of accessing the asset class. Two per cent plus TER? You’re having an expensive laugh. These factors can only be justified if there is a genuinely attractive opportunity in real estate.
In terms of the current fundamentals, it is nearly impossible to justify from an income perspective. While a UK commercial property fund's assets may just yield circa 6 per cent, you need to adjust the yield for the cash weighting – typically 20 per cent – and taxes, meaning that the yield you get in your pocket is close to 4 per cent.
This may be better than govvies, but far less attractive than many other asset classes, particularly when adjusted for the illiquidity factor.
However, sometimes it is sensible to accept moderate liquidity risk, higher charges and an uninspiring yield if there is an obvious recovery potential in capital values. Here there is more cause for debate, in my unlearned opinion.
In some sectors in some parts of the UK, there is tangible evidence of the spare capacity being utilised and genuine signs of a recovery in prices. South East retail would be an obvious current example. However, our research suggests that UK commercial property funds are an inefficient method of exploiting the opportunities on offer, due to their diverse nature.
So what are the alternative routes to a selective UK commercial property recovery?
REITs (real estate investment trusts) are one such avenue, but the specialist companies are mostly overvalued and have been a primary beneficiary of the "close your eyes and hope for the best" desperation for yield investment policy employed by many global investors.
This is not a UK phenomenon, but rather a global epidemic, obliterating – for the most part – any blatant value in listed real estate markets. Finally, any investment in REITs should be considered as part of your equity allocation, as we have found out in the last six years.
Maybe I do have a strong view then. However, as I have previously mentioned, there is a time and place for everything and we benefited from holding UK commercial property between the early days of our firm in 2003 and when we became nervous over illiquidity and valuations in early 2007.
Then in mid-2009, encouraged by contacts in the inter-dealer property markets who told us that German insurance companies and Australian pension funds were clamouring to get their hands on UK prime real estate, we exploited a distressed opportunity. This value had unwound within 18 months and we sold in the early months of 2011.
Since then, most UK commercial property assets have gone the way of the UK economy: listless and lumbering, before staging an unconvincing recent recovery. There is a fair chance that this recovery will continue, as long as our forecast of the UK’s re-emergence from stagnation is proved correct.
Performance of sector over 1yr
Source: FE Analytics
However, with plenty of slack remaining in the economy, no obvious medium-term inflation pressures, better yield opportunities elsewhere, no evidence of a wide supply/demand imbalance and structural concerns over fees and liquidity, it is unlikely we will change our view in the immediate future.
Tom Becket is chief investment officer at Psigma Investment Management. The views expressed here are his own.
Among the fund managers who are more optimistic on commercial property are FE Alpha Manager Bill McQuaker, who told FE Trustnet earlier this year that he was buying it as an alternative to bonds, and Chelsea Financial’s Darius McDermott, who has recently bought Henderson UK Property for his mother's portfolio.
