By Peter Roscrow, managing director of Close Property Management As with equities, there are a n...
By Peter Roscrow, managing director of Close Property Management
As with equities, there are a number of asset classes within the commercial property market, some of which are performing well while others are suffering.
It is important for investors and advisers to consider this when they are reviewing the numerous investment products available. For example, within the commercial property market, there are three key sectors: office, retail and industrial. Within each of these sectors are numerous sub-sectors, all of which perform differently.
For example, office property can be broken down between central London, West End, Docklands and the regions, while retail property can be categorised into high street, shopping centres and out of town.
Although the returns from such investments will depend on factors such as the state of the general economy and interest rate levels, more specific factors should also be taken into account when considering when to invest and when to exit.
The central London office market, and to a lesser extent the West End office market, is suffering from an increased level of voids, which is leading to a reduction in quoting rents. This is a reflection of the current recession in the financial services sector in the City of London, where employers have been cutting staff and shelving expansion plans.
We can see a similar contrast in the retail sector. Taken as a whole, the sector has enjoyed a rebound from its relatively poor performance in 2001. However, it is only when we break this down into individual components we find the strongest area of growth has been in out of town shopping centres, with the poorest returns coming from high street shops.
On the industrial side, performance has been more uniform, although there will inevitably be instances when care needs to be taken.
For example, we were recently on the verge of acquiring an industrial estate when the company operating across the road laid off 600 staff. On balance, we decided not to proceed because of the extra level of risk now attached to this location.
The commercial property sector still offers investment opportunities for both the institutional and private investor. In our experience, most private investors will opt for a cautious combination of risk and reward. To ensure low risk, investors will not wish to push borrowing levels too high. If they do, it means the bank has the security rather than the investor.
Nonetheless, investors should be able to obtain an attractive income stream of at least 6%-7% per year. More specialist investment products will be able to offer even more.
Over the past 12 months or so, we have seen an increasing number of such products packaged for the private investor and, as a result, we believe commercial property will henceforth form a much larger part of private investors' portfolios.
While returns of, say, 10% per year may not historically compare well with equities, they will do very well for investors at present. However, investors should be aware property must be considered a medium to long-term investment, typically for a period of at least three to four years.
Asset backed investment.
Number of new products available.
Good growth prospects.
Negative press for the market.
Medium to long term investment horizon.
Need to choose sector carefully.
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