This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, George Shaw of the Ignis Property fund explains why a recovering economy is good for commercial property
The attraction of commercial property and the stable income stream it provides ensures that the asset class continues to merit a place in any diversified investment portfolio. Year to date returns support the view that property is becoming an increasingly attractive asset class, particularly among investors who are looking beyond cash for income.
According to the IPD UK Monthly Index, commercial All Property total returns improved to 1.9% in the second quarter of 2013, from the 1.1% reported in quarter one, the highest level of performance recorded since the third quarter of 2011. Through quarter two, commercial property outperformed UK equities and gilts by considerable margins. We expect the investment performance of UK commercial property this year, and for the foreseeable future, to continue to deliver solid real returns to investors.
Recent positive signs that the economy is improving, combined with investors’ continued search for yield and a plausible alternative to fixed income, has seen the investment market for commercial property gather pace. IMA data to the end of July shows net inflows to the sector have increased for the fourth consecutive month. However, selecting the most suitable fund from the myriad of offerings within the property sector is essential for investors. Each type of property vehicle has its own characteristics and investors should be clear about their investment objectives.
Commercial property funds, through proactive asset management, have a strong focus on generating income. Asset managers should always be disciplined and focussed in the asset management of portfolios, maintaining and, wherever possible, enhancing existing income streams.
We believe that there will be a margin in performance between high quality prime / institutional grade properties which are more likely to hold their values whilst providing a stable income stream, compared with poorer quality secondary/tertiary assets which tend to be vulnerable to capital depreciation, income shortfalls during periods of economic uncertainty and limited occupier demand.
While the economic picture is undoubtedly starting to turn more positive, it is important not to lose sight of the substantial challenges which remain. Disposable income is still weak, small and medium sized enterprises are still struggling to source appropriate financing, unemployment remains high, especially long-term unemployment and UK exports remain heavily exposed to the eurozone economies.
