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Commercial Property

 

Past performance

A skilled property manager can outperform the IPD index by being in the right place at the right time.

The leading source of information about UK property performance is Investment Property Databank (IPD), an independent performance monitoring organisation. IPD measures the performance of commercial property worth £121 billion [k], equivalent to 45% of the total property assets of UK institutions and listed property companies at December 2004. IPD's main property index started in 1980, long enough ago to provide some meaningful long-term statistics over a couple of economic cycles.

The stability of commercial property when compared with volatile UK equities makes the three consecutive years of modest losses for property between 1990 and 1992 stand out. This reflects a difficult period in the UK commercial property market. The economy was in recession, and tenant demand for property was weak. The Central London office sector was particularly hard hit. Speculative developments that had been started in the late 1980s came on stream just as tenant demand vanished. The end result was that the banks, which had financed much of the development, became unwilling property owners as the developer/borrowers went bust. It was a salutary lesson for all parties and has since meant that significant investment in pre-let developments has only started when tenants have already been found.

As well as displaying less volatility, commercial property performance also tends to run on a different cycle from shares. Thus, when the stockmarket crashed in autumn 1987, the property market was unmoved and performed strongly over the year. On the other hand, shares outperformed property in the early 1990s, as they anticipated recovery from the recession. In the current economic cycle shares disappointed through 2000 to March 2003, while over the same period commercial property returns were robust and have continued to deliver sound performance.

Another way to look at the relative performance of commercial property is to consider the average annual total gross returns over various periods.


Average Annual Return (Gross)1y3y5y10y
Commercial property (IPD Index)+19.0+13.6+11.5+11.2
Shares (FTSE All-Share Index)+15.3+2.6-1.0+8.5
Government Bonds (FT Gilts 5-15 years)+6.8+5.6+6.5+8.6


Data is to end Jan-2005 [k].
What the numbers in the table [k] do not reveal is the difference among the three main commercial property sectors. For example, in 2003 the retail sector achieved a total return of 15.5%, while the office sector, managed just 3.2% [k]. In 2000, the picture was almost the exact opposite: office returns were 15.4% while retail came in third with 6.7% [k].

Such variations mean that a skilled property manager can outperform the IPD index by being in the right place at the right time. It also echoes the need for diversification because it is impossible to always back the right sectors. Even if it were, the costs of buying and selling property discourage rapid portfolio turnover.

Not necessarily a guide to the future
Attractive though the performance of commercial property has been, the statistics should not be read to imply property should be the only part of your portfolio. As the investment advertisements regularly remind us, past performance is not necessarily a guide to the future. What the data from IPD does show is that in the past including commercial property in your portfolio is likely to have reduced risk and may have smoothed out overall returns.

Source: [k] Investment Property Databank.
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