Fundamentals of the market for commercial property mean it should offer returns in the high single digits through this year, says Anthony Wyld, managing director Close Brothers Investment Limited.
Increasing investments in the asset class by pension funds diversifying portfolios along with growing demand for rental income by an ageing population, growing use of SIPPs, and a commercial buy-to-let market are cited as reasons why the market could return up to 9.5% this year.
The current state of the market indicates that new commercial space is being absorbed by relatively stable, albeit, perhaps slower GDP growth, while the interest rate cycle is estimated to be at or near its peak, and levels of development are relatively subdued, indicating there is not a wave of commercial space set to hit the market anytime soon.
”Developers cranes are in the shed,” Wyld says, compared to previously noted cycles of commercial property construction.
Despite fears about the residential property market, historical returns indicate there are few occasions when macro and micro-economic stability are undone enough to force both markets down in tandem, Wyld says.
Different types of commercial property will fare differently, however.
The use of SIPPs may see more businesses buy up their own premises through their own pension funds. That is more likely to affect so-called “courtyard developments”, rather than the “crinkly tin shed” of the type found on light industrial estates, Wyld adds.
There are also different tiers in the market, with pension fund money more likely to seek out “prime locations”. Given the estimated £40bn to £80bn that may find its way into the sector from pension funds in the next few years as portfolios are rebalanced, it may be asset values could be overdone. However, second tier properties may do better in this respect, for example, with yields less affected.
Close is looking at the sector as part of its launch of an Isa and Pep compliant property fund of funds - Closepip Isa and Pep Plc - that should enable investors to choose between a focus on capital growth or rental income from different types of commercial property.
Also, by locating the vehicle on the Isle of Man, investors should get their returns gross without losing out through the lack of a dividend tax credit, which has eradicated the tax advantage of an ISA for basic rate tax payers, Wyld adds.IFAonline
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