As retail giants such as HMV and Jessops announce the closure of stores across the UK, investors are questioning the value of holding commercial property.
High streets are predicted to struggle over the next 12 months as the UK’s economy recovery continues at a slow pace. So are there opportunities in the sector?
In the two years after February 2007, the average fund in the IMA Property sector lost 52.2 per cent, according to FE Analytic figures. Since then, the sector has been on an unsteady upward trend but managed to return more than 11 per cent in the 12 months to February 2013.
This apparent turnaround in performance might lure some investors back to the sector, however not everyone is convinced.
Bestinvest managing director Jason Hollands warns now is not a good time to be investing in UK commercial property.
Hollands says: “The outlook for the UK economy remains weak, particularly for retailers as exemplified by recent high profile collapses such as HMV and Jessops.
“This is adding downward pressure on rents, while void rates – those periods when properties go empty between tenants – are on the rise.
“Additionally, in the UK commercial property market there is a big increase in loan re-financing expected this year and in 2014. Given the more conservative lending strategies in place at most banks, there is a risk they will refuse to extend credit on such favourable terms and this could lead to a lot of property coming back onto the market, which will not be helpful for valuations.”
Hollands says there are better opportunities in overseas commercial property at the moment, but investors intent on buying UK commercial property should look to portfolios skewed towards London and the South-east, as these areas are weathering the economic doldrums better than the rest of the country.
Deloitte’s 2013 UK Real Estate Predictions, published in January, show international demand for UK property is expected to increase this year as the pool of capital from overseas investors increases further. The report says around 25 per cent of the City of London is currently owned by international investors and £20bn was invested in the UK from abroad last year.
Artemis fund manager Jacob de Tusch-Lec has increased the £110.1m Artemis Global Income fund’s exposure to real estate investment trusts, but he is investing in property abroad and holds no UK property in his fund.
He identifies Asia as a good investment region for Reits because the region pegs exchange rates to the US dollar.
Tusch-Lec says: “What you are seeing in Europe is that the European Central Bank is setting funding costs at levels that are very low in order to avoid the southern periphery collapsing again.
“The problem in the UK is that you have very little growth in the economy. I find it more interesting to be in areas of the world which are growing and have interest rates similar to the UK.”
However not all managers believe REITs that invest in the UK are unattractive. Premier Pan European Property Share fund senior investment manager Alex Ross notes that Reits are benefiting from their access to the bond market.
Ross says: “The unique nature of the prolonged bank de-leveraging from real estate means true low-cost real estate financing is only available to those able to access alternative financing, such as tapping the bond markets.
“The largest UK and northern European Reits are now taking advantage of the high demand bond markets to issue bonds with, from the borrower’s perspective, highly attractive long-term fixed finance costs. This is why the Reit sector is well positioned to drive market leading returns to investors in the coming years.”
HSBC Private Bank UK head of investment strategy Willem Sels believes some investors will find safety in ‘bricks and mortar’, supporting the case for real estate.
Sels says: “Alternative assets do not typically provide much income, with the notable exception of real estate, where yields exceed those of safe haven bonds or often even corporate bonds.
“In a low-yield world, this is one of the main attractions of real estate, which we overweight in portfolios.”
Morningstar OBSR investment director Peter Toogood believes commercial property could provide an attractive option for “yield-starved” investors.
Toogood says: “While UK institutions may not yet be aggressively raising commercial property weightings to access the 7 per cent yield available compared to 3 per cent on 20-year UK gilts, there are a large number of overseas pension funds and wealth funds that are drastically cutting back on government bond exposure in favour of commercial property.”
Toogood suggests the relatively healthy yield offered by commercial property could make it a good alternative to bonds, where yields have reached an all-time low.
Hargreaves Lansdown senior investment manager Rob Morgan says: “I think the one thing to be said is if you can get properties which are fully occupied and you are getting a decent yield from them in an era of low interest, which is what we have had for a sustained period, then the income on offer is good.
“However you have to bear in mind that with retail property the high street is not a particularly healthy place at the moment. You have closures and long-term lets coming up for renewal that are not actually getting new tenants, which puts pressure on yields.”