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Interest building in commercial property

Retail sales in the property sector leapt in August with a net inflow of £129m, the largest into the sector for more than two years and markedly higher than the £34m taken in July.

The latest figures from the Investment Management Association signal that investors are warming to the commercial property sector, beckoned by income yields of 5 per cent or more but advisers remain cautious.

Hargreaves Lansdown’s Mark Dampier is turning more positive on the sector for the first time in at least 6 years.

He says: “Not only does the commercial property market appear to be reaching a bottom, but there is also less concern about liquidity. The majority of fund managers are no longer under pressure to raise cash by selling property – they can now get on the front foot and look to capitalise on the opportunities.”

However he warns that further problems in the economy lie ahead and suggests that investors allocate no more than about 2.5 – 5 per cent of their portfolio to commercial property.

London-based City Asset Management is also turning more positive on the asset class.

Investment director David Willcox says: “We’re taking the view that this is beginning to become an attractive asset.

We’re currently at a zero weighting in the UK and have been since the beginning of 2007. We’re thinking we may move our zero to two per cent within the next two months.

We will be buying unlevered funds with no debt if we do it. It will tend to be larger funds for liqudity and we are looking preferably at funds which have cash to invest.

“We’re taking a cautious step. Relative to cash this is beginning to become an attractive asset on a total return basis if you look at it over the next three years.”

M&G property portfolio fund manager Fiona Rowley believes commercial property should outperform cash in 2010 but she says: “the management of income will be vital in the face of challenging rental markets as occupiers work through the economic downturn.”

Rowley says the asset class looks cheap for investors who are willing to take a long-term view. She favours high-street shops and specific warehouses but is avoiding central London offices.

She says: “Offices in major provincial centres are yielding 7 per cent though I am avoiding offices in the West End where yields are 5.5 per cent.” (both figures as at end August).

Alan Steel Asset Management consultant Alan Adam is not expecting the commercial property market to kick off for another 12-18 months yet.

He says: “I hate to say the word ‘premature’ but people are saying commercial property is going to follow the equity market and we think it is a long way off.

“We think there’s better opportunities elsewhere in equities and we will look at property but certainly not in the near horizon.”

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There is one comment at the moment, we would love to hear your opinion too.

  1. Interest building in commercial property
    The number of enquires I am receiving for latent defect insurance on commerical properties is increasing markedly. This shows the market is both picking up yet still fragile with landlords having to provide this cover for prospective tennants.

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