Property has increasingly attracted the attention of investors over recent years, as sentiment towards the asset class warmed and the heavy losses of the financial crisis faded into the background.
Over the last two years, the FTSE All Share Real Estate Investment & Services index has comfortably doubled the performance of the FTSE All Share, achieving returns of 37.17 per cent.
However, over the last six months the index has boomed, almost tripling the FTSE All Share with a return of more than 24 per cent.
Performance of indices over 6 months
Source: FE Analytics
Investors have piled billions of pounds into the property sector generally over the last few years due to its relatively high returns, attractive income and reliable consumer demand. 
However, as with all popular sectors, some investors are beginning to worry that its performance is going to have to undergo a correction at some point.
Would buying into a property fund now be a case of riding the wave too late? A number of financial experts, including Apollo’s Ryan Hughes (pictured), don’t seem to think so.
“We’ve got quite a big exposure to property – about 20 per cent of our [Apollo Multi Asset Balanced] fund is in physical commercial property,” he said.
“We certainly see a lot of upside, mainly on the premise that there is still a limited supply of good-quality commercial property in the right area as a hangover from the financial crisis.”
“That’s based around the idea that, during the financial crisis, all speculative building of commercial property went on hold – people thought the world was ending and the banking system was collapsing.”
“So people didn’t start the process of building commercial property, which obviously takes a long time – from finding a site, to planning, to building, to getting tenants in. We’re still in a catch-up phase where that limited supply of property is there but there is actually quite high demand as the economy recovers.”
As a result of this limited supply, many investors are turning their attention away from prime property that is already highly-valued and instead focusing on secondary property where there is more room for growth.
Parmenion’s Meera Hearnden said: “In our latest review, we found that prime areas of the market performed really well, whereas secondary property hasn’t performed as well.”
“But we tried to identify where the value was and in prime areas the yields have been compressed over the last couple of years. But, in the secondary market, yields are still attractive on property – commercial property is very much a yield-income game and we identified value there.”
Many investors are looking to key cities away from central London such as Birmingham, Manchester and Bristol, where there is both a limited property supply and the occurrence of substantial economic growth.
Does this mean that prime properties in central London are losing their shine? Not necessarily, according to SG Wealth Management’s Neil Shillito.
“There is possibly some value left in prime, but because London is always in the headlines about property prices, people say it’s a busted flush and it’s too toppy. That’s a ridiculous statement because you can’t equate the city of London with an industrial state in Birmingham or Glasgow,” he reasoned.
“I have some clients who are all very senior in a major international firm of chartered surveyors in London and their view is that, ‘okay, prime is perhaps coming off a bit, but London is most definitely seen as the firehouse of the world economically’.”
“Overseas investors see London as being a safe haven for their money and they like prime property because they feel secure. It’s a nice trophy asset to tell their mates about – that they’ve got an office building in the West End or they’ve got a residential building there because it gives them kudos.”
“I think yes, there is still some value left in prime property, but you wouldn’t be investing in prime now with the expectation that you’ll get a double-digit return. But very wealthy investors really aren’t bothered about double-digit returns, what they want is security.”
This raises a further issue when investing in property funds – the high double-digit returns that the property market saw last year have dropped substantially across both prime and secondary sub-sectors.
As a result, many investors have been deterred from property funds as they believe that the easy money has already been made. While returns are still respectable and reaching high single-digit figures, there is still apprehension as to whether this will continue to decrease.
“Investors are not stupid – they know that we’ve been riding a wave for a few years and it’s inevitable that cyclical yields are going to come off and therefore prices will drop as well,” Shillito pointed out.
“I think double-digit [returns] have had their day and the reason is that there’s a lot of money chasing high-end property, it’s not that easy to come by.”
“You’d think that if there’s a lot of money chasing it that prices would go up, which is of course sound economics, but if it’s not being turned over and it’s not for sale then you can’t buy it. I think that’s the major reason that even London is limited in its supply of high-end properties.”
This drop in returns is coupled with the expense incurred when investing in property funds. The sector can involve huge legal charges associated with property and agency fees, as well as initial charges and annual management fees.
However, many investors argue that these costs are easily recovered through the high level of income and the additional capital growth available within the property sector.
“It is definitely a more expensive asset class to manage, but if you’re still talking about a net return of maybe 7 or 8 per cent for this year after charges, then I think that’s still a very healthy return and the charges shouldn’t put investors off,” Hughes said.
“As always, you need to think about the impact of those charges and make sure that you’re getting a fund that’s of sufficient quality to justify the charges that you’re paying.”
Shillito added: “If you have to ask the price of a Rolls Royce you probably can’t afford it. I think that property investors shrug their shoulders and say, ‘okay, that cost me 4 per cent but hey, that’s easily the yield in the first year and I’m off to the races after that.”
Another reason that investors are willing to pay high prices for property funds is the added promise of security.
The combination of a stable government over the next five years, the increase in overseas investors and a fairly strong economy certainly bodes well for the sector.
What’s more, with a growing population that is living longer combined with a finite land mass, it is arguable that property is likely to remain in demand over the longer term, even if the sector performance does rise and fall over time.