Morningstar OBSR investment research analyst Muna Abu-Habsa scrutinises some of the best property funds on the market...
Polarisation in the valuations of prime and secondary property assets has dominated the returns of property funds so far into 2012. Central London safe havens remain in vogue and investments outside of these have been commanding a high and increasing risk premium.
Although transaction volumes have fallen sharply, foreign investors have continued to focus on prime London properties.
Given the limited supply of these, central London office and retail markets then continued to deliver robust rental growth. That being said, it is often challenging for retail property funds to get sufficient exposure to the largest City office blocks due to the significant price tags attached.
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This pattern is not surprising, however. As 10-year gilt yields continue to fall, UK commercial property offers a substantial yield pick-up with prime yields at 6.2%, according to CBRE.
Some commentators expect this to be erased by falling capital values. Indeed, the decline in UK commercial property capital values continued to gather pace this year, with all three main UK commercial property sectors continuing to decline; namely retail, office and industrial.
The decline was particularly marked in retail, especially retail warehouses. Also, while central London values have generally continued to advance, UK regional performance has continued to worsen.
Flight to quality
As in most other sectors, the place to hide during the difficult times is in quality assets and companies with strong balance sheets and, following substantial recapitalisation, the main UK real estate investment trusts (REITs) fit the bill.
In fact, REITs have significantly outperformed all equity sectors in the past six months by a wide margin. Newsflow from the majors has remained positive and decent earnings momentum and above average yields are still attracting buyers.
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