December 4, 2009 6:04 pm

Investors return to home comforts

UK investors’ appetite for property has re-emerged – despite a shocking few years for the sector, which saw markets across the world plummet.

Sales of property funds soared in October, making property the most popular asset class for the first time in more than two years, according to figures released by the Investment Management Association (IMA) this week.

Investors are also planning to increase their allocation to property further. A Barclays Wealth survey of 2,000 wealthy global investors this week found that 35 per cent of respondents planned to boost the proportion of property in their portfolios over the next two years, while 48 per cent would maintain their current allocations.

Investors have been tempted back into the sector following the recent rally in UK house prices, as well as signs of a gradual economic recovery. The UK house market has seen seven months of consecutive rises, according to the Nationwide House Price Index.

However, experts warn that the short-term outlook remains shaky. Mark Dampier, head of research at Hargreaves Lansdown, the financial advisers, believes that the full downturn in the housing market may not be felt until next year.

“I thought 2009 was going to be a tough year but I think it’s been delayed by government actions. We’ve seen money come back into people’s pockets with cuts in interest rates, but I think a lot of it is going to be reversed next year,” he says.

Michael Dicks, chief economist at Barclays Wealth, says he is recommending people to be “cautious” of the UK housing market. “For the mainstream market, we don’t think it has come down to what we believe is fair value.”

Investors are, therefore, scouting for better opportunities in other countries.

According to Dicks, the US housing market now looks cheap and is likely to provide better returns over the next five years.

Research from Close Brothers reveals that Britons who bought overseas properties without a foreign currency mortgage four years ago have made significant gains due to the value of sterling against the local currency.

But it may be the beleaguered commercial property market that provides the most attractive investment in the sector, experts say.

“Certain parts of the property investment universe now offer real attractions and opportunities for investors,” says Peter Cosmetatos of Reita, the UK property investment trust body.

WHERE TO INVEST?

UK RESIDENTIAL

The UK residential market has undergone a rally in recent months but experts remain cautious about the sector, with further price falls predicted next year.

“It feels a bit too good to be true with what we’re seeing in some of the monthly data,” says Michael Dicks at Barclays Wealth. “We think there’s still a lot of pain to come for the household sector – with the end of quantitative easing and higher interest rates on the cards.”

Dicks says the mainstream market has still not come down to what he thinks is “fair value”. But he thinks the top end of the property market, where there is a shortage of quality homes, will do better, with prices expected either to increase slightly or to remain flat.

US RESIDENTIAL

The US housing market suffered a far bigger slump than the UK’s, prompting several experts to argue that it now looks relatively cheap.

“The US strikes us as a more convincing case for residential property,” says Michael Dicks at Barclays Wealth. He expects the market to return 5 to 10 per cent a year over the next five years, compared with zero for the UK residential market over the next three years.

Miranda John, international manager at Savills Private Finance, says investors can find some bargains in the US. “You can probably pick up a five-bedroom house in Florida for about $200,000,” she says.

According to Stuart Law, of Assetz, buy-to-let investors can achieve gross yields of up to 20 per cent in the US through purchases of repossessed homes.

COMMERCIAL PROPERTY

The commercial property market fell by 45 per cent between June 2007 and June 2009, according to the IPD Index, though it has seen a small upswing of 4.5 per cent since June this year.

Mark Dampier, of Hargreaves Lansdown, believes the prospective returns on commercial property are better than those for residential. “Property fund managers think that over the next five years they may get total returns of 8 per cent per annum. That’s not a bad return if you have low interest rates,” he says. Dampier says investors could “dip a toe” in the market and invest between 2.5 to 5 per cent in their portfolio.

The commercial property market also faces challenges next year with rental values still falling, weak demand from underlying occupiers and maturing bank debt.

EUROPEAN PROPERTY

European fund managers are taking an interest in industrial properties in Poland and vacant offices in Paris.

Standard Life Investments is launching a pan-European property recovery fund with a portfolio that will include office, retail and industrial properties across Europe.

There are only a handful of European property funds on the market, including Aviva European Property Fund and Premier Pan European Property Share Fund.

Some markets, such as Spain, have been affected severely by the downturn in commercial lending and a decline in demand for housing while wealthier markets, such as Switzerland, remain sought-after, according to Liam Bailey, head of residential research with Knight Frank.

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