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Investment View

Property enjoys a special place in the minds of the British. We are more

likely to own our own home than to rent in this country. Many fortunes have

been made in the commercial property market but it is all changing fast.

Last week&#39s announcement that Britain&#39s second-biggest property company,

MEPC, is to quit the public arena served as a reminder that the property

world is very different now.

You only have to look at the rich-lists of a decade or so ago to realise

that many of Britain&#39s self-made men had acquired their fortune through

property. Property was a classless industry. It enabled those with shrewd

judgement to compete with the establishment. Before the Second World War,

property was the province of the ruling classes but all that changed

swiftly. After the war, there was opportunity in plenty, particularly in a

London savaged by the blitz.

Today&#39s lists of the wealthiest in the country suggest that property is

less important. A self-made millionaire is as likely to have achieved

wealth through internet enterprise.

The problem is that property has not adapted as a business. Investment

returns have not been as spectacular as in other financial assets, even if

those of us lucky enough to climb on to the personal property ladder early

on will have acquired a useful nest egg by now. Commercial property returns

have disappointed and property is a cyclical business where downturns can –

and do – occur. With money made more easily in other sectors and with many

of the major investing institutions now preferring to hold their property

assets directly, the role of the property company is in doubt.

MEPC is to go private through an agreed bid from a combination of GE

Capital, always one of the more innovative financial services businesses,

and Hermes, manager of the BT and Post Office pension funds. As it happens,

it is the BT pension fund that is putting up the money but Hermes, which

has always taken a considerable interest in the property market, will have

contributed significantly. The deal has, at least, perked up the property

sector, which was languishing at a significant discount to the value of

underlying assets. Popular wisdom has it that this move will encourage a

rush of rationalisation as other property companies head for the door and

the trend towards the direct institutional ownership of bricks and mortar

gathers pace.

There are analogies to be drawn with the investment trust movement, which

has been endeavouring to replace institutional shareholders with private

investors. The reasoning is certainly similar. Institutions were big

holders of investment trust shares when their own skills in managing

portfolios were less well developed than they are today. Now they have vast

resources of their own, the rationale behind holding investment trust

shares is not as great, so they become natural sellers. This produced the

high discounts that existed in this sector, in much the same way that

property shares stand at a significant discount to the market value of the

office blocks, warehouses and shopping centres they own. But it is unlikely

that private investors will replace the institutions as owners of property

companies in the same way.

There is, of course, at least one property investment trust. TR Property

stands at its year&#39s high but the shares are still at a discount of some 18

per cent to the value of underlying assets. While it does have a portfolio

of property shares, it is also able to make direct property investments.

Overall, it has achieved a good long-term record and, if the property

market is in for a shake-up, it could benefit although one wonders what

happens if this old economy sector shrinks to the point where investment

choice is limited.


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