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Floor plan

Advertisements for commercial property funds have been conspicuous by their absence in recent times. It is not surprising, given the pasting that many funds been handed out over the past year.

Yet property has been a solid asset class for decades and there seems little doubt that it will play a pivotal part in many a portfolio in the years to come, although the mainstream private investor may be understandably nervy to do so in the immediate future.

The question is whether it is worth returning to the sector just yet? Certainly, given some recent murmurings, you wonder whether the contrarians are starting to seek out opportunities in the beleaguered sector already.

First, you have John Duffield commenting that New Star is set to begin advertising again for its commercial property funds. Given the high profile of the fund and the scrutiny that New Star has faced in recent months, such a decision would not be taken lightly.

If proof were needed that investors are already returning to the sector, you have it with the news that M&G has moved back to offer pricing for its property fund. In other words, it has more people buying the fund than running for cover.

But that is not all. The latest official statistics indicate that the bottom may indeed be in sight.

According to the IPD, its monthly index saw value fall – but less than in the previous months. Property delivered a total return of -0.8 per cent in March, a very slight improvement on the -1 per cent return seen in February and continuing the upward trend since the -3.7 per cent return in December. Capital values fell by 1.3 per cent in March after a 1.5 per cent fall in February and a 2 per cent fall in January.

The IPD said that the first quarter of 2008 has not proved to be a rerun of the sharp pricing correction on commercial property witnessed in the final quarter of 2007, while rents continue to grow in all of the three main sectors.

“The results may not signal the bottom of the market just yet but at least investors have a better idea of where the floor is likely to be,” added the IPD.

Just as in any downturn, companies get lumped together and so long as it had property in the name it would have been hit by the turmoil. Yet many reckon that the bad news is in the price and has been discounted heavily. The contrarians have been keeping an eye out for opportunities in the sector – particularly in the investment trust arena – where many are priced at discounts to the net value of the underlying assets of 30 per cent or more. The average discount in March was 23 per cent according to the Association of Investment Companies.

Several commentators have highlighted the potential of trusts such as Foreign & Colonial property trust – Cazenove rates it as one that will outperform. Its discount has already narrowed from 33 per cent to around 23 per cent in the past three months while investors are getting a yield of 6 per cent.

TR Property is another trust that crops up when talking to brokers while Land Securities is a favoured Reit.

It is not easy pickings as there are trusts with worryingly high levels of gearing and some that are close to breaking banking covenants. It could also be a while before positive returns make a comeback – Merrill Lynch suggests 2010 before values are back in the black.

There are also the unknowns of the credit crunch. It could get worse before it gets better – a slowdown in the economy could have an impact on rents – although the dislocation between interest rates could be resolved if the Bank of England steps in – and that seems increasingly likely.

Judging when a market has bottomed is a hazardous task which is why several analysts are happy to sit on the sidelines for a while longer. But others, with a long-term view in mind, are sighting opportunities safe in the knowledge they are getting get paid a decent yield while they wait. They may well be rewarded for their bravery.

Paul Farrow is personal finance editor at the Telegraph Media GroupMoney Marketing

50 Poland Street, London W1F 7AX


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