YourMoney.com Mailbag: Should I invest in commercial property?

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26/05/2016
'I have been reading a lot about commercial property recently and how it is becoming a popular asset to hold through a pension in retirement, especially with the recent changes in stamp duty land tax. How can I go about doing this and what are the risks?' Sam, Kent

Martin Tilley, director of technical services, Dentons Pension Management

Property sits as one of three major asset classes alongside equities (stocks and shares) and fixed interest (bonds and cash) and like the other asset classes has its own particular characteristics of risk and reward.

Perhaps the recent popularity of ‘property’ as an asset class has risen as a result of the negative issues of other asset classes. Cash and bond yields have reduced significantly as a result of global quantitative easing and equity markets have proven volatile, being influenced often by sentiment rather than fundamentals. In contrast, many people like the comfort of knowing they are invested in bricks and mortar and seeing a stream of income from rental yields which have outstripped all but the highest risk or “junk bonds”.

Although not directly related to residential property, commercial property has enjoyed a long recovery since 2008/9 assisted by low inflation and low interest rates, the latter providing relatively cheap borrowing.

Access to the asset class can be via collective funds, which will invest in a multitude of properties split geographically and through different sectors to provide diversification. These funds can be accessed via many of the insured pension plans or platforms or bespoke self-invested personal pensions (SIPPs). Direct commercial property ownership can be accessed only through the true bespoke SIPPs though. Being heavily exposed to any one asset class is however a risk and both means of holding commercial property have their downsides.

Collective funds, whilst reducing risk by spreading exposure through different geographic and industry areas, are more expensive to hold, bearing in mind the costs of fund management, property management and surveyors valuation fees. They may also have issues of illiquidity when withdrawals might outstrip new investment, leading to a delay of disinvestment.

The illiquidity and risk of tenancy void are greater with directly held property and tenancy void could turn the asset into a liability as whilst no tenant and no rent are in place, commercial rates and insurance premiums must still be obtained.

Costs of holding and management of a single directly held commercial property might usually be lower than the apportioned costs of large funds though.

Whichever route is chosen, it is important that the individual understands the characteristics and ramifications of commercial property investment. Direct commercial property ownership should be for sophisticated investors and property professionals only.

Darius McDermott, managing director, Chelsea Financial Services

The first thing to mention at the moment is the recent decision of a number of funds investing in commercial property to move to bid pricing because of increased fund outflows.  This basically means is that if an investor wants to sell their holding in one of these funds they will be charged more for doing so. Funds do this in an effort to discourage redemptions, so that remaining investors are not disadvantaged.

Outflows in the sector have increased for a mixture of reasons. Firstly, after four good years of performance in terms of both capital and income, some investors will simply be taking profits. There is also the Brexit factor. As we saw ahead of the Scottish referendum, people and investors put off buying property where there is so much uncertainty around the outcome and what it may mean for the economy, stock markets and property markets.

In our view, however, this isn’t a signal that property is about to fall off a cliff. We think there is still money to be made in the sector (albeit lower returns than the past four years) and it’s still a good diversifier for a wider portfolio (with correlation to other asset classes reasonably low) and it’s a way of getting a decent level of income.

While the Henderson UK Property fund is one which has moved to a bid pricing basis, it remains Elite Rated by FundCalibre and is still held in the Chelsea portfolios. Meanwhile if you want to invest in property but don’t want to hold physical property, then we like the F&C Real Estate Securities and Premier Pan European Property funds. They in the shares of companies involved in physical commercial property, rather than in the buildings themselves.

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