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Quality quest

The drawbacks of property became all too apparent as funds suspended redemptions to cope with a market in which selling was all but impossible.

Brian Tora
Brian Tora

It seems that commercial property is back in vogue, though. According to Cofunds, 9 per cent of current net sales on their platform were represented by property funds in the first quarter of 2010 – up from 7 per cent in the last three months of 2009. Little surprise, then, that the latest of the round tables they held was on this very subject. With M&G, Swip and Schroders all represented, it promised to be an informative session.

Property is always an emotive asset class for UK investors. While attitudes are changing, a glance at the Sunday Times Rich List and the fair sprinkling of property entrepreneurs present goes some way to explaining why domestic investors often believe this is the safest path to true wealth.

The reality, of course, is that it is subject to cycles in much the same way as other assets and is particularly vulnerable to economic trends.
It has been the most recent downturn in economic activity that has wrought the greatest damage for investors, although the effects have been exaggerated by the steep rise in values that accompanied the rush of money into the sector during the middle of the last decade. Property was an easy sale following the swingeing bear market in equities that ushered in the new millennium, while income prospects looked sound too.

In the end, it was the geared plays that suffered most while those funds with less than prime portfolios also found life tough.

Indeed, if one message came across loud and clear from the three property managers present at the forum I chaired, it was that quality was every-thing. The recovery that had taken place was welcome and widely spread but problems still lurked, so sticking with the top end of the market made no more than prudent sense.

The consensus was that City property looks good value at present – perhaps a surprising call, given the continued uncertainty in the financial sector. However, the slowdown in development, coupled with a generally improving environment, has led to a swift uptake of space, with more than two million square feet of office space being let during the first quarter of this year.

The recent rise in values is likely to moderate, long-term prospects look encouraging.

As does rental growth, which has risen by an amazing 7 per cent during the past six months. Again, Fiona Rowley of M&G, William Hill of Schroders and Gerry Ferguson, who runs the Swip property fund, agrees that such a pace is unsustainable.

But it adds to a more positive picture, even if care still needed to be exercised. In particular, all three have some concerns over retail property, where we continued to have an oversupply compared with Europe.

I came away encouraged but still cautious. The previous bull market saw 61 quarters of positive growth. What we were seeing now is recovery rather than long-term sustainable growth. But opportunities do exist as banks offload portfolios and hospitals and nursing homes become contenders for inclusion in property funds. Good managers should prosper in such an environment but it is not a one-way bet.

Brian Tora ( is principal of the Tora Partnership


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