Is commercial property investment dead in the water?
Source: Trustnet.com
While fund manager Tony Yousefian acknowledges that commercial property has had a setback, he thinks that prospects are still positive enough to make it a good diversifier in any portfolio.
"The property market is not as attractive as it was 18 months ago, but it is far from dead in the water. EFA OPM Property has around 30 per cent invested in traditional bricks and mortar. While this has come down from close to 40 per cent, we still think there is good potential in the market,” he said.
The remaining 70 per cent of the fund’s portfolio is primarily invested in Real Estate Investment Trusts (REITS). The fund also holds a small weighting to cash and structured products.
While 52.5 per cent of the fund is weighted to the UK, nearly half of this exposure is international. Yousefian thinks that the best value in the market lies outside of the UK, particularly in Asian emerging markets.
"Nearly 13 per cent of the fund is directly invested in Asia, but much of the UK exposure focuses on the region. We bought an Indian company called Trinity Capital, for example, at a heavy discount, which has been a very good performer," he added.
Manager of the £1.73bn M&G Property Portfolio Fiona Rowley believes that the UK commercial property market is a mixed bag. She says that the capital values at the lower end of the market are likely to fall in the first half of 2011, but thinks the prime market is well positioned.
Performance of funds vs sector over 3-yrs
Source: Financial Express Analytics
Like Yousefian, she admits that the strong rally in UK property that began in 2009 has run out of steam, but thinks that higher quality properties are fairly priced with yields at sustainable levels.
"The key message at this stage would be 'don’t chase yield'. Weaker properties may appear attractive with some double-digit yields. However, the rental market will remain difficult for such property and I believe pricing still doesn’t adequately reflect the greater risk to that income," she added.
The manager believes that the UK commercial property market should produce an annualised return of between seven and eight per cent.
Senior investment adviser at Bestinvest Adrian Lowcock thinks that property is still a good diversifier, but that investors need to be selective in the current climate.
"Capital values have had a run since mid-2009, but investors need to be careful when they enter the market," he said.
"It is important to be strategic in terms of valuations. The huge amount of money that has flooded into the market has driven down yields, so property is less attractive now than it was."
"That said, funds that target income such as Schroder Global Property Maximiser are still a good bet," he added.