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Safe as warehouses?

Last week&#39s launch of a fund management company investing purely in commercial property has highlighted the extent to which the industry is seeking alternative ways to generate returns.

Mayfair Capital Partners claims to be the UK&#39s first independent private-client fund manager to focus solely on property but it is not the only fund manager that has tried to exploit this market over the past couple of years.

The companies that offer such funds – and there are many – are as keen as Mayfair to highlight statistics showing that commercial property, as an asset class, has provided an average annual return of 12.6 per cent over the past five years.

It is the kind of performance that has made some IFAs sit up and take notice. Pretty Financial director Kim North says: “Property has done very well and I think it still has legs. It is an asset class that has truly performed. For those investors who are not yet brave enough to go back into the stockmarket, commercial property represents a good place to be.”

North believes the commercial property sector has at least a year or two to go before its performance begins to tail off. But, despite the fact that it has outperformed gilts and equities over recent years, many IFAs remain unconvinced by commercial property. Yet there is a lack of consensus over where else investors should seek returns.

Bates Investment head of research James Dalby believes that as long as investors steer clear of tracker funds – or closet trackers – they should continue to take their chances on the stockmarket.

He says: “Investors should not pile into property solely on the basis that it has performed well in comparison with other asset classes. I appreciate that there will always be a demand for warehouses and offices and commercial property growth has been smooth but the fact remains that there is a lot more value in the stockmarket if you are looking for good opportunities.”

Bates suggests that equity income funds that do not impose benchmarks – such as those managed by Credit Suisse&#39s Bill Mott and Invesco Perpetual&#39s Neil Woodford – represent investors&#39 best option in the current climate. As true stockpickers, Bates says they can avoid the companies which, while not imploding on the scale of WorldCom or Enron, have dragged the stockmarket down at a time when profit warnings seem to have become a weekly occurrence.

But some IFAs go so far as to warn that investors could be making a grave mistake by opting for property funds. Simpsons of Brighton IFA partner Andrew Merricks says there are worrying parallels between the state of the property sector and the technology bubble which burst so spectacularly in March 2000.

He says: “Haven&#39t we seen this all before? Whenever there is a surge in something, we see a raft of funds coming out and suddenly all the fund managers are experts. The investment world is desperate to find a big sell at the moment but property looks to me exactly the same as the tech market did before it collapsed. Everyone is just buying into something that is past its sell-by date.”

Merricks says the fact that there is such a commotion over property at present is “as good a call as any” that it has reached the top of its cycle. Like Dalby, he favours the stockpicking approach, in particular, the aggressive focus funds.

Despite the negative IFA sentiment, Mayfair joint foun-der James Thornton remains bullish, saying that he considers equities to be a bigger risk than commercial property. He says: “I do not see the bubble bursting. Even in the worst case scenario, say you owned the Enron premises, you will still own the building, whatever happened. We would not be launching this company unless we believed in it.”

However, Hargreaves Lansdown points out that investors in commercial property face problems in retreating from the market when things take a turn for the worse.

Senior analyst Meera Patel says: “Holding commercial property is not the same as holding equities, which investors can sell quickly and easily. It takes longer to pull out, which means that when prices slump – and the bubble will burst sooner or later – investors could be struggling to ditch their investment.”

Nevertheless, Patel does not feel that there are real comparisons with the tech boom, which she says was characterised by short-term bets with limited visibility while property is an asset class which provides lower returns over a longer period of time.

Her tip for investors is investment-grade and high-yield bonds, both of which she believes will be well supported by falling equity markets.

However, not everyone believes that investors should be seeking to invest at all in the current climate. Merricks, for instance, says investors “should sit on their hands and wait for the downturn to be over. It may not pay much in the way of commission for IFAs but it is in the client&#39s best interests”.

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