The upturn in UK commercial property is in full flow as cash continues to fly into funds.
It was not that long ago that the sector was rocked to its core by liquidity problems and lock-ins.
But recent figures from the Investment Management Association confirm the upsurge. In August 2009, the sector had a net inflow of £129m, the biggest in two years, but since then the sector has not looked back. Funds in the IMA property sector stood at £10.5bn in February compared with £7.8bn in September 2009. The sector was the highest seller in January 2010 and for the last quarter of 2009.
Funds are starting to show positive returns over the past 12 months, with the average fund up by over 20 per cent while competitive yields comp-ared with the likes of UK equity income, are also helping the sector gain traction.
But detractors point to the optimism being fuelled by foreign investors attrac-ted by the fall in sterling and underlying property prices plunging by 30 to 40 per cent. Taken overall, this has led to a drop in prices of around 50 per cent.
Hargreaves Lansdown head of research Mark Dampier says investors should allocate a portion of their portfolio to property but must be cautious in doing so.
He says one of the major problems facing property funds is the level of cash flowing into them.
“Some of the funds hold between 25 and 50 per cent in cash, which destroys the argument for it being an income asset. It does not make it a terribly attractive asset class but if you are in, then stay.”
Dampier says the cash-flow is causing the oppo-site problem to that faced by property funds two or three years ago. “Before, they could not sell prop-erties quick enough and now they cannot buy them quick enough.”
Aegon fund manager David Wise says most of the money is being thrown at big retail funds and they have been buying prime defensive properties with long-term income.
He says: “This is arguably at the more expensive end of things but there is still value to be found and I still see it as a good prospect in the medium term.”
Henderson property fund director Marcus Langlands Pearse admits the outlook is linked to banks in terms of bringing stock to the market.
He says: “The banks view the property market as being at a level where they can recoup the majority of debts and this may cool what was becoming an overheated London market.”
Wise says the cash levels are a concern as some funds have over-promoted their real estate beyond their capability to get that cash into the market.
“Some may dress it up as prudent management but some have high cash levels and their funds have multiplied in size in the past year. No matter how good you are, you cannot cope with that,” he adds.
One of the major concerns facing the property sector remains the banks’ need to offload the £100bn-plus of commercial property from their loanbooks. Many banks are now trying to take advantage of strong markets to sell properties.
Wise believes the concern about banks has been overplayed.
He says: “The banks seem to have a strong position in commercial property funds but it appears they have made the decision to work that out over a long period of time. There are more sales coming through but that has not stopped the market recovery. Do not forget we have seen a 45 per cent peak to trough fall and only around a 15 per cent recovery. There is nothing the banks are likely to do to derail that.”
Langlands Pearse says that for five years the Bank of England has been saying that banks have had too much exposure to commercial property and called for a reduction in an orderly fashion.
“The good secondary yields are continuing to appear while at the prime end of the market, property remains fairly priced.”