Private investors return to commercial property

An increase in appetite from private investors for commercial property has triggered the launch of a number of new funds from investment houses keen to benefit from the change in sentiment.

This week, BDO Stoy Hayward Investment Management and Strutt and Parker announced the upcoming launch of the UK Strategic Income Property Fund and Clavis Walden also made public its plans to launch the UK’s first new Property Authorised Investment Fund. These come as Seven Dials Fund Management launches its Lightstone Prime High Street Fund.

The growing activity in the sector is being seen by some as a sign that the worst of the commercial property downturn is over and private investors are ready to come back into the market.

New research from Hotbed backs this up, with more than half of the private banks it surveyed planning to raise their recommended allocation to commercial property. Three quarters of the banks also said they believed the coming year would be a good time to invest in commercial property, up from just 33 per cent in 2008.

A number of investment fund houses are also re-
entering the market. Standard Life is launching a property fund because of “attractive property pricing”, Aviva is planning a new commercial property launch and Swip bought three properties for its property trust last month.

Commercial property has taken a battering over the past two years, with prices falling by more than 40 per cent from their peak in June 2007. But the latest research shows the falls are coming to an end.

Investment Property Databank, the supplier of property data, says the most recent figures for July show that values of certain types of property are rising for the first time since 2007 and its benchmark index is yielding close to 8 per cent. Overall, UK commercial property values are poised to “go positive” for the first time in 25 months and rents are falling less rapidly.

“The [property] price correction seen over the last two years has opened a window for us to invest in the market at pricing levels not seen for over 15 years,” says Iain Keys, managing director of Clavis Walden. “Income yields provide very attractive returns in an income-starved environment but with the added prospect for capital growth in the long term.”

But while the new funds are causing a stir in the industry, some experts are warning that the best value for commercial property may still be in existing funds. “As more funds come into the market there is more money chasing fewer deals and therefore prices for these properties are being driven up,” says Adrian Lowcock at Bestinvest, the adviser. “Investors could be better off buying into a fund that has a good portfolio of properties already so they could benefit from the rise in prices.”

Occupancy rates are also still a concern for anyone investing in commercial property. The IPD figures reported that vacancy rates have fallen to 11.8 per cent from June’s record high of 12.1 per cent but Malcolm Frodsham, research director at IPD, urged caution. “Yield compression and a deceleration in rental pressure is indeed a fillip for the commercial property market,” he says. “But we should be careful in reading too much into one month’s numbers: we may have to wait a long time before rental growth actually turns positive.”

Other industry experts also raised concerns. James Sullivan managing director at PILinvests, an alternative asset fund specialist, says: “Demand for office space is falling as businesses have been contracting, so values for these properties have been falling. But there are subsectors that have better stories to tell such as properties used for industrial spaces where businesses’ ability to ride through the recession is greater.”

Some advisers believe there is more pain to come. “Although we are seeing firming yields and interest from investors, it is premature to assume that the market has fully bottomed out,” says Meera Patel at Hargreaves Lansdown. “While it is likely that there will be further movement in the sector, it will continue to be limited in impact until there is a marked improvement in bank lending and liquidity.”

NEW FUNDS

This trio of funds are attracting the interest of commercial property enthusiasts who believe prices are set to rebound in the UK:

● BDO Stoy Hayward’s UK Strategic Income Property Fund: Investors must part with a minimum of £100,000 to take a stake in the fund and no redemptions are permitted for five years. But with commercial property prices bottoming out in the UK, managers hope to deliver an income payout twice a year totalling 5-6 per cent once the portfolio is invested fully. Small capital distributions may be distributed as well if and when properties are sold. Fees are high, however. Investors face an annual charge of 1 per cent; an initial charge of 2 per cent; as well as a performance fee if annual returns are greater than 10 per cent. The level of gearing is expected to be as high as 50 per cent.

● The commercial property group Clavis Walden’s Property Authorised Investment fund (Paif) has yet to gain approval from regulators at the Financial Services Authority. If it receives the green light, the open-ended vehicle will be the first property fund launched in the UK that pays dividends from rental income to investors before tax. Theoretically, this makes Paifs – which were introduced in last year’s Budget – more attractive to pension funds, local authorities and charities, as well as retail investors investing via a tax-exempt Isa wrapper. The fund is targeting a gross return of 7 per cent per year. Its total expense ratio is expected to be near 1.2 per cent.

● The closed-ended Lightstone Prime High Street fund, managed by Seven Dials Fund Management, is set to invest in shops in Chester, Cambridge, Kingston and Canterbury. About a dozen properties, ranging in value from £1m to £7m and offering initial yields of as much as 6.5 per cent, will be included in the portfolio’s mix. The fund aims to deliver 5 per cent annually after commissions, offering investors the prospect of capital growth and annualised total returns of 10 per cent over the five-year life of the fund.