Pension funds should consider investing more in commercial property as last year's investment perfor...
Pension funds should consider investing more in commercial property as last year's investment performance has exceeded expectations, Legal & General says.
Statistics presented in L&G's latest fundamental report suggest the use of property as an investment class could benefit all sizes of pension funds.
This comes as commercial property has continued to gain from growth in the UK economy over the past year, with figures from the Investment Property Databank showing a total return on the UK commercial property market of 9.5%.
And this trend does not seem to be receding as the market produced a total return of over 3% to the end of April.
Strong consumer and government spending as well as the regressive potential of rental agreements have all contributed to this positive effect, L&G says.
Author of the report and head of Property Research Malcolm Frodsham says the recent rise in the commercial property market now make investing possible for all sizes of pension fund.
But Frodsham adds that having a "properly diversified commercial property portfolio is key to gaining the benefits of owning this asset class".
When building a diversified portfolio, there are three dimensions that should be taken into account, he says.
Firstly, the type of letting is important as long-term lettings decrease the risk of the investment.
It is also important to look at the property type as the main property sectors – retail, office and industrial – can all differ significantly.
At the moment, those commercial property markets most closely associated with consumer and government spending are experiencing stronger demand, Frodsham says.
A property's location also has to be considered as the demand for commercial holdings can differ hugely between different regions.
The classical 'North-South divide' however, he adds, is not as much an issue nowadays as the 'East-West divide', which currently exists across London.
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