Property regains favour with investors

Nia Williams

November 2, 2011

This is the view of the Association of Investment Companies which surveyed property managers for their views on the outlook for the sector.

Income is a strong pull for the sector with yields currently averaging 6.3% but returns have been positive too, up 23% over the last three years to the end of September 2011 compared to the average investment company increase of 18%.

Jason Baggaley, manager, Standard Life Investments Property Income, believes that: “Despite heightened volatility and unprecedented uncertainty resulting from the ongoing eurozone problems, UK Commercial Real Estate continues to be one of the few asset classes to provide reasonable positive returns over the year to date (according to IPD).”

Richard Kirby, manager, F&C Commercial Property Trust commented: “The property market has proved remarkably resilient in the face of slow domestic economic growth, fiscal austerity, a stalling of economic recovery overseas and the eurozone crisis.

“There has been two years of sustained growth following a severe downturn. The initial sharp bounce-back, has been replaced by a year when performance has been largely driven by income. In September 2011, the annual total return was 8.7%, of which 6.9% was attributable to income, according to the IPD Monthly Index.”

In the UK property market, London continues to outperform other regions although this difference could become less marked.

Kirby said: “London has out-performed the regions, helped by a stronger local economy, a more affluent population, tight new supply, its role as an international as well as a national centre and its relative resilience to public sector cutbacks.

“Overseas investors have been attracted to this market, with London seen as a large, mature, transparent and liquid market.

“This out-performance is expected to persist for the next year or so but the gap between London and the regions may narrow, particularly for City offices, given the turmoil in the financial and debt markets. Nor should prime property in regional markets be written off.”

Although the long term outlook for property is positive, investors must be prepared to weather any storms which may result from recent volatility. As Baggaley cautioned: “Some weakness in pricing is anticipated over the next few months as more stock is brought to market and it is likely that the softer prices are accentuated for secondary assets in poorer locations with greater investor demand continuing for relatively low risk assets.

“Despite some softening in the prices for poorer quality stock, reasonable positive total returns are expected over the next few years for investors as yields compensate for any modest capital declines.”

Annabel Brodie-Smith, communications director, Association of Investment Companies added: “Property is regaining its place as a mainstay of a well-diversified portfolio.

“Property is once more in demand for its ability to provide investors with attractive levels of income.”

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