Time to get back into commercial property?

Published 04th Oct 2009

Entrepreneurs are turning their attentions to the sector again


JAMES CAAN, one of the Dragons’ Den judges, is to launch a commercial property fund with ING Direct next month on the back of growing confidence in the sector.

Caan is the latest high-profile investor to announce an interest, following Nick Leslau, who appeared in Channel 4’s Secret Millionaire last year, and Shaf Rasul, another Dragon who appears in the online version of the show.

It comes as UK commercial property has registered its first growth in more than two years, climbing 0.2% in August, according to the Investment Property Databank index. It follows a near-50% drop since the 2007 peak.

Meanwhile, yields on commercial property (rental income as a proportion of the price) have risen over that time from 4.6% to about 7.9% — more than 10 times the typical easy-access savings account at 0.78% and more than double the yield on 10-year gilts (government bonds) of 3.5%.

The upturn has convinced some of the most sceptical investors to reconsider the sector. Last week, Peter Hargreaves, chief executive of Hargreaves Lansdown, the adviser, said he was positive about the sector for the first time.

A number of funds have also been launched. Last month, BDO Stoy Hayward Investment Management launched the UK Strategic Income Property fund with plans for 10% yields.

Retail investors are also piling in. Last week, TD Waterhouse, the stockbroker, said listed commercial property companies such as Songbird Estates, which has a stake in London’s Canary Wharf, entered its top 10 list of the most-bought stocks for the first time in 18 months.

Caan told The Sunday Times he plans to launch his fund, which will require a minimum investment of £200,000, within six weeks. It will target properties, mostly offices, worth between £15m and £30m, with long leases.

He is already eying up properties, including a Ministry of Defence building with a 15-year lease and a yield of 7.25%. “We are looking for these long-term quality tenants to ensure a regular income,” he said. “The fund is very much geared towards fixed income generation.”

The fund will be launched by Hamilton Bradshaw, Caan’s private-equity business, in partnership with ING Real Estate Investment Management.

Chris Morrogh at Threadneedle has been increasing his commercial property holdings. “Although it may be too late to buy at rock bottom prices, it’s still not too late to make a sound long-term investment,” he said. He built up cash reserves of about 15% in the early part of 2007 but this is now down to 6% and he plans to reduce it further. Recently, he has bought real estate in Swindon and is receiving a yield of 8.5%.

He said: “Commercial property, especially those with long leases, with big well-known tenants, offer in-built insulation against economic uncertainty — you will still be paid rent, even if property prices start to fall.”

Overseas investors, keen to take advantage of the weak pound, are also pushing up prices. Last week, South Korea’s $200 billion (£125 billion) state pension fund expressed interest in buying HSBC’s Canary Wharf headquarters.

For individuals who want to get in, Mick Gilligan of Killik, the broker, said many property stocks were already overpriced and that investors might not be able to pick up the bargains they were hoping for.

Shares in British Land, for example, have gained 32% in the past six months alone and the shares are trading at a premium of 28% to net asset value — the value of its underlying property assets. Shares in Land Securities, however, have soared 43%, although they are trading at a 2% discount.

Mark Dampier at Hargreaves Lansdown is positive on the sector for the first time in at least six years but warns that storm clouds still loom. He suggests investors “dip their toes” and allocate no more than about 2.5% to 5% of their portfolio to commercial property. He recommends the Threadneedle UK Property trust, a unit trust that buys bricks and mortar. It is down 5.2% over the past year and about 1% over the past six months.

This demonstrates one of the key differences between funds that buy bricks and mortar and funds that buy property shares. While the latter have had a strong performance, bricks and mortar funds have lagged — although this means investors who get in now may benefit as the funds play catch up.

Source: ' Sunday Times '

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