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Tenants’ extra

Commercial property has had a very good run over the past five years, with unit trusts which invest directly in property rather than property shares showing returns of around 12 per cent a year to October 1, 2006. I do not expect this rate of return to continue because quite a lot of the performance was due to falling yields but I do expect returns to be in high single figures.

This view is confirmed by most commercial property specialists. However, the yields are still higher than equities and in many cases above comparable gilt yields.

The fundamentals of the property sector still remain firmly intact, with most rents likely to rise at least as fast as inflation. Returns in this sector have proved to be less volatile than even Government bonds over the past 15 years. This is because leases on commercial property are generally long term, often with upward-only rent reviews, while tenants tend to be reliable because commercial entities can ill afford to lose their work premises.

Furthermore, robust economic growth is leading to a rise in rents, particularly in the office and industrial property sectors. However, retail rents are unlikely to perform as well due to some falling profits in this sector.

One extraordinary statistic, according to the Investment Management Association, is that only 2.7 per cent of funds are held in property. I believe that at least 20 per cent should be held in commercial property in realistic portfolios, with rather more in conservative portfolios.

The fund I like best is the New Star property unit trust under the excellent management of Roger Dossett and his team. This fund does also have a small proportion invested in property shares under the management of the highly regarded UK equity manager Stephen Whittaker.

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