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Adviser Fund Index

The outlook for returns in commercial property is not looking as positive as it has in the last few years. But at the last AFI rebalancing in November, panellists’ aggregate allocation to commercial property increased across all three indices from 3 per cent in the aggressive to 10 per cent in the cautious.

Hilary Coghill of City Asset Management has a 10 per cent exposure to commercial property. She admits that UK property returns may have seen their peak already but maintains that the sector still gives superior returns to bonds.

She says: “UK commercial property may well disappoint some people this year but if you can get 7 per cent, it is still better than bonds. We have readjusted our commercial property weighting in the UK and increased our weighting in Europe and Far East Japan. We think returns are a lot better ex-UK.”

The Reits and Quoted Property Company (Reita) said in November that 44 per cent of financial advisers plan to incorporate UK Reits into their clients’ portfolios at their launch at the start of January. However, Coghill thinks the gains have already been priced into Reits.

She says: “I do not think we would buy a direct Reits fund. They are more in line with equ-ity markets and are much more volatile. We prefer physical property funds. We are looking at property as an asset allocation. As well as for yield, we are looking at property as a diversifier.”

Paul Ilott of Bates Invest-ment Services has a 20 per cent exposure to commercial property in each of the AFI indices. In the aggressive AFI index, he also has exposure to property securities.

Ilott says: “For some time, we have had a fairly high exposure to real bricks and mortar. Commercial property does have characteristics synonymous with fixed income by way of the fairly predictable stream of rental income that it provides and returns for commercial property have exhibited relatively low volatility. That characteristic has attracted us over the last six months or so. Also, we believed UK commercial property has better growth potential compared with fixed-interest products.”

Unlike Coghill, Ilott is looking to potentially reduce his exposure to real bricks and mortar and increase his exposure to property securities. He says some of the drivers of commercial property are waning.

He says: “Information that we are getting from a variety of sources on the commercial property outlook is that it is a crowded marketplace and that fund managers are finding it hard to locate quality propositions.

“We are potentially going to reduce real bricks and mortar exposure and replace that with property securities. Some of the drivers of commercial property, like low interest rates, are waning and commercial property cannot be immune from what is happening in the marketplace.”

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