Investing in the UK commercial property market

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Written by:
06/03/2015
We live in an era of low interest rates, and lower growth. Typical income-bearing products offer below average returns, and neither saving nor current accounts offer consumers much in the way of reward.

Unsurprisingly, those in search of a consistent source of income from their savings are considering diversification into alternative options. The UK commercial property market could well be the solution.

A long-standing and mature industry, commercial property attracts a broad range of investors – both at home, and internationally. “The UK leads Europe in commercial property,” says Darius McDermott, managing director of Chelsea Financial Services. “Three years ago, the national market accounted for 18.7 per cent of the European total.”

Direct investment in commercial property (i.e. buying shares in a commercial building, or outright purchase) is, however, impractical and financially prohibitive for the majority of private investors. Commercial property – whether retail, office or industrial – typically costs millions to purchase or build, meaning most investors can only secure exposure via funds.

“Commercial property funds are great vehicles, because they enable average investors to penetrate a lucrative field they wouldn’t be able to otherwise,” Darius believes. “You can invest in some funds for as little as £1,000, meaning they blow the market wide open to savers and investors of every means.”

Commercial property has historically outperformed most other major asset classes. “The returns offered compare favourably with equities and government bonds,” Darius notes, “and property has been demonstrably less volatile than either product over time.”

Movements up or down are rare indeed – in the 323 months between December 1986 and November 2013, the monthly total return on UK commercial property exceeded +/- 3 per cent nine times. This is in stark contrast to 155 times in the case of UK equities, and 31 times in the case of government bonds.

“Commercial property is a boring investment,” says Darius, “and I mean that in the best possible way.”

“A boring investment is one that offers a largely unchanging and dependably positive income for an extended period – say, 12-24 months. While you may not experience the excitement of value surges, there’s very little risk indeed. It’s a ‘get rich slow’ proposition.”

Investors profit from rental income, in the form of fund distributions. The contractually guaranteed nature of rents accounts for the consistency and dependability of investor income; as long as a property is occupied, income can be guaranteed at a set level for the length of a lease – there is the potential for rents (and, in turn, incomes) to increase during this period, too. What’s more, commercial leases tend to run longer on average than their residential counterparts, and properties command higher rents.

For those interested in making a start, or investigating further, Darius has some recommendations.

“Henderson’s UK property unit trust focuses on quality properties, with a geographical bias towards the south of England,” Darius states. “The number of properties on their books that are fully let is high, and this makes for a strong, dependable yield of 3.6 per cent.”

“I can also recommend Standard Life’s Property Income Trust,” Darius concludes. “While adhering to a similar ethos to Henderson’s, the trust also purchases lower grade properties and renovates them, meaning there’s more scope for capital growth.”

“It’s not a tremendous yield story, but given the other options available, 2.5 per cent is comparatively attractive.”

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