The strong domestic economy is having a positive impact on the property market although there is lit...
The strong domestic economy is having a positive impact on the property market although there is little sign of a boom.
Don Jordison, director of Scudder Threadneedle Property Investment, says: "The market is showing an admirable level of restraint in speculative development. There is a good economic backdrop but the industry has not gone crazy."
Like other old economy sectors it suffered in February and March of this year as investors used it to fund purchases at the tail end of the tech, media and telecoms bull run.
Since then, when it reached unsustainably low valuations according to Keith Burdon, investment manager at Britannic Asset Management, property has staged a strong recovery.
Burdon notes that there has been considerable corporate activity in the sector, with lots of deals among smaller companies to return them to private ownership. For instance, MEPC was bought by GE Capital and Hermes.
The sector has some negative characteristics, Burdon believes, including illiquidity and some pressure on rental property valuations. It is a small sector in which most fund managers are already overweight, he says.
The main risk for the sector, according to Jordison, is that it returns to type, aided and abetted by banks pumping borrowed money into speculative developments.
But he says commercial property investments currently have a rental yield of 6.9%, which is higher than the yield on both long gilts and the stock market.
Jordison believes commercial property is in relatively short supply, giving scope for increased rents, especially as vacation rates are at a 10-year low.
He adds: "You do not need that much rental growth to get a satisfactory return on investment. Even if rents grew in line with inflation you are looking at a double-figure return."
Jordison likes business space in London and the South-east rather than retail space, as this has been the main theme for the past five years. He notes that financial services, media and technology companies experienced significant growth this year and their demand for space boosted rental growth.
Adrian Frost, head of UK equities at Deutsche Asset Management, likes property companies that have a focused and consistent investment philosophy but feels there are not many of them. He says: "The property shares that have done best stick to what they are good at, the specialists. Those that try to be all things to all men tend not to perform so well. Most property companies are disappointing investments."
Deutsche Asset Management, which is overweight the sector, has holdings in Canary Wharf and Pillar Properties, both of which Frost describes as specialist property businesses. Pillar specialises in out-of-town retail space.
He says: "Both have concentrated on a particular portion of the market and both have a good understanding of capital relative to other property companies."
Britannic Asset Management has holdings in Chelsfield, a development company, which has a successful track record in large developments. Burdon says it is more entrepreneurial than most companies in the sector.
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