Commercial property is providing a relatively secure yield with opportunities for income growth, acc...
Commercial property is providing a relatively secure yield with opportunities for income growth, according to Andy Hicks, manager of Edinburgh Property Portfolio.
Paul Talbot, managing director, Edinburgh portfolio, says investors have been attracted by the stability of property in a period of volatility. The yields hold an appeal at a time when an increasing proportion of UK corporates are either cutting or failing to pay dividends, says Hicks.
He adds: 'Over 2001, the commercial property market returned 7.1% for investors while equity markets were down -13.3%. In 2002, returns from commercial property remain steady, with the 12-month rolling return virtually unchanged at 7% since October 2001.'
Income from commercial property is underpinned by the 'upwards only' rent review process, which in most cases does not permit the income to fall even if rents in other similar properties are falling, says Hicks.
He adds: 'In addition, we usually find that when overheads are under pressure, the rent is the last expenditure to see default as businesses cannot operate without premises.'
Using central London as a barometer, demand for property in the UK has fallen, says Alex Watt, managing director, property investments at Standard Life.
He adds: 'A combination of economic uncertainty and the reaction to 11 September attacks meant corporate expansion and relocation plans were placed on the back burner. In addition, the supply of second-hand space increased in the second half of the year, pushing vacancy rates higher.'
Levels of supply of space are low by historic standards but Hicks anticipates a resumption of rental and capital growth if the economy gets better during 2003 and 2004 and business confidence further improves.
Watt says: 'With the prospect of a more positive outlook and a return to healthy levels of growth, we expect a bounce back in demand.
'Consequently, despite the increase in available second hand space, the restrained supply of new space will create an environment for rents to grow above the rate of inflation.'
Hicks is increasing his weighting in the retail warehouse sector, buying the Whitecliffe Business Park, Dover, at the beginning of the year. Its purchase price is £4.575m and will produce an initial yield of 7.75%.
Hicks says: 'The initial rent payable is comparatively low and this should provide good opportunities for both income and capital growth. This acquisition brings the total number of properties to 12, with approximately 70% of these invested in offices and the remainder in retail warehouse units. The geographical focus of the fund is to invest in the Southeast of England and Central London.'
Watt says: 'Looking forward, offices and industrials in the UK offer the prospect for higher returns than shops. Although UK retail sales have recently regained strength, deflation and price conscious shoppers continue to put pressures on retailers' margins. Out of town retailing remains attractive, with low levels of supply and strong spending on bulky DIY and electrical goods.'
Secure property yield.
Resumption of rental growth.
Retail warehouse sector good.
Corporation expansion on back burner.
Vacancy rates high.
Bargain hunters put pressure on retailers.
Tracking real performance
Diversified return team
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