Scottish Mutual has introduced the commercial property plan, an investment trust that aims to produce income or growth by investing in commercial property.
The product is designed to allow retail investors a means of diversification as an alternative to equity and bond investments, but it has an unusual structure. It will invest in two closed-ended investment companies, the commercial property income fund and the commercial property growth fund. These funds in turn will invest in the Westbury Commercial property fund, which is an Oeic for institutional investors.
Investors in the Scottish Mutual product must decide at the outset whether to invest for income or growth. Although the two commercial property funds invest in the same underlying fund, their objectives are different so investors looking for income and growth would need to invest in both funds.
The income fund has a target yield of 7.14 per cent gross a year and the growth fund will reinvest all of its income back into the Westbury fund. The Westbury fund itself invests in an actively managed portfolio of retail, office and industrial properties throughout the UK.
Figures from the Property Investment Databank show that commercial property has returned 7.9 per cent so far during 2002, while the FTSE All Share Index has delivered negative returns of -26.8 per cent over the same period. Some investors could take this as evidence of the need to diversify into property.
Unlike residential property, commercial property tends to be let on long-term leases and upwards-only rent reviews are common, which may produce high yields. However, the investment trust structure may be too complicated for some investors and is likely to be of interest only to sophisticated investors.