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Friday market view: Income investors should be looking at property

Ainslie McLennan Henderson 2012

During times of economic uncertainty investors are often on the lookout for an investment diversifier that helps to spread risk away from traditional asset classes and that provides an attractive and stable level of income. We believe UK commercial property provides just that.

On leaving home every day for work the physical and lasting attributes of property are there for all to see. While purchasing another residential property is not an option for most, gaining a ‘bricks and mortar’ investment exposure to UK commercial property in a variety of locations across the country provides a solid investment opportunity within a diversified portfolio.

In a year driven by global growth concerns and the eurozone sovereign debt crisis, the high transaction costs on commercial property and the general long-term nature of property investors means the asset class has not been affected as much by the short-term swings in market sentiment that have characterised the equity or bond markets.

In addition, solid levels of rental income continue to underpin the attractions of commercial property. At a time when yields on traditional income bearing products such as government bonds remain meagre and cash deposit rates offer investors very little reward on their savings and can actually lose money when the effects of inflation are taken into account, income from commercial property remains appealing.

By way of a comparison, at the end of September 2012, 10-year UK gilts yielded 1.7 per cent, the dividend yield on the FTSE All-Share index was 3.6 per cent, while the net initial yield on the Investment Property Databank UK Property index was a very healthy 6.4 per cent.

Investors need to be mindful that the commercial property market is not immune from global economic fragility.

In a low growth environment where UK consumers continue to tighten their purse strings, some tenants on Britain’s high streets, shopping centres and retail parks will continue to struggle, putting pressure on occupancy rates, particularly within non-prime locations.

Economic woes are not new, however, and most tenants trade through them. Moreover, property has some unusual but appealing characteristics compared to most other asset classes in that active management, such as refurbishment and lease negotiation, has the potential to strengthen income from the property and enhance its capital value.

Looking ahead to 2013, success clearly depends on the quality of a property and if it has a tenant base that is strong enough to withstand further economic stress. Therefore, high occupancy rates and low-risk tenants are key.

We continue to favour prime tenants on long leases, with some of our principal properties let to established names that offer confidence in terms of income security, such as B&Q, Centrica and Tesco.

Ainslie McLennan is manager of the Henderson UK Property Unit Trust

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