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Slow change of course for commercial super-tanker

Remarkably, given that we are right in the middle of the bucket and spade season, there is so much news around that I feel positively spoilt for choice. First, we have the plethora of company results being showered on those who feel obliged to take notice. By and large, these have not been too bad. By that I mean, of course, that our worst fears have not been realised. The first half of 2009 has not exactly been a bed of roses but we have survived.

Then there is the economic news around. This, too, has not painted a disastrous picture but nor has it signalled the start of a sustained recovery. While expectations have grown for a V-shaped rebound – supported by an increase in activity as inventories are rebuilt – it would be wrong to dismiss the possibility of the recovery withering on the vine as the unwinding of the debt overhang besetting many consumers continues.

Perhaps the most encouraging aspect of what is happening at present is the way in which diverse asset classes seem to be recovering together. There is even talk of house prices ending the year higher than they started.

Confidence is returning across the board, with investors once again prepared to assume degrees of risk. There is one exception, though. Commercial property remains unloved.

It happened that last week I attended a presentation on the Aviva investors property trust. Aviva are serious players in the commercial property world. Until sterling slid against the euro, they believed they could lay claim to being the biggest investment managers of commercial property in Europe. Putting their case to potential investors was a clear sign that the corner had been turned. Or was it?

I confess to having come away with a sense of confusion over what the near term held in store for investors in this bombed-out sector.

Having been the darling of the asset diversification promoters a few years ago (in 2004, 05 and 06 compound total returns of 18 per cent were achieved on average), we have seen a fall in values, peak to trough, of more than 50 per cent. Moreover, while the Reit market has rebounded with equities in general, physical buildings still languish.

Commercial property is the investment asset equivalent of the super-tanker. It takes a long time to turn around and, once committed to a course, will only change from it slowly and painfully.

Aviva’s view is that it is starting to turn around but that the process will last for some months – perhaps into the New Year. With yields back up to attractive levels, despite a higher than usual number of empty properties, the total return should be positive from here on.

I hope they are right but confess to being a little concerned that they remain sellers of selected properties and see their first purchases as being in the Reit market, which has already seen a significant bounce.

Commercial property is, of course, a core asset class. The Aviva fund has been around since 1991 and is worth well over £1bn. I will be watching but probably waiting for the time being.

Brian Tora ( is principal of the Tora Partnership



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