Commercial Property – a safe haven or to be avoided?

City of London at twilight- Photo by Lars P. Mathiassen

City of London at twilight- Photo by Lars P. Mathiassen

Financial markets have endured a great deal of volatility recently, reflecting growing global economic uncertainty and fears of another recession. Heightened risk aversion has translated into heavy selling of equities, with investors favouring assets perceived as safe havens, such as gold, some currency markets such as the Swiss Franc, and AAA-rated corporate bonds. Highest-quality commercial real estate has also benefited somewhat from this hasty retreat from risky assets.

Take note though that commercial real estate is by no means immune to an economic slowdown and it is important that investors remember that property investment returns are a function of economic activity. For example, if manufacturing slows down, the industrial real estate sector is hit. Alternatively, if consumer spending slows, then retail property asset returns may suffer. Consequently, valuations on these assets can fall and rents decline.

However, commercial real estate has proven to be more robust than some other asset classes in recent challenging economic conditions, supported by investors seeking income in a low growth, low interest rate environment. In the UK, for example, the income yield margin that commercial real estate offers over government and high-quality corporate bonds is close to record levels. In international markets too, property yields generally offer healthy margins over bonds, with regions as diverse as Japan and some Scandinavian markets offering the most attractive income prospects.

Property holdings should, like most asset classes, be for the long-term. The majority of my clients will have a portion of their wealth invested in property funds. Fund selection is as always the key and we can assist in recommending several property funds, both UK and Global, which can form part of your portfolio. These can include REITs (investment trusts holding and managing property) as well as Unit Trusts and OEICs) some of which invest in REITs). Right now many REITs show attractive discounts (the difference between their price and the (higher) net asset value).

As ever, make sure you get good independent advice when deciding where to put your investment wealth.

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