Look to property trusts for income

In a climate where the existence of so-called "safe havens" is being questioned by currency shifts and exaggerated market moves, where do investors turn?

Many will be looking for steady income streams to safeguard against any capital depreciation that may result from unpredictable market activity. Of the sectors currently offering good yields, property may be one of the most attractive. With average yields in the Property Direct UK sector at 6.3 per cent, some investors may be tempted to take a look.

The hunt for income has been a major theme of 2011, with investors looking for methods to compensate for a high inflation and low interest rate environment. This has resulted in many companies that offer high dividends trading on premiums. For example the UK Growth & Income sector is on a premium of nearly 2 per cent, compared with a 9 per cent discount for the industry as a whole. Conversely, despite some attractive yields, the property sector as a whole was on an average discount of 11 per cent at the end of September 2011, down slightly from 12 per cent a year ago.

Even so, the property investment company sector has staged something of a recovery since the difficulties of 2008, which put it firmly out of vogue for investors, and the sector closed 2008 on a whopping 44 per cent discount.

In today’s economic environment, the asset class is faring better.

Richard Kirby, manager of F&C Commercial Property Trust, says: "The property market has proved remarkably resilient in the face of slow domestic economic growth, fiscal austerity, a stalling of economic recovery overseas and the eurozone crisis."

"There have been two years of sustained growth following a severe downturn. The initial sharp bounce-back has been replaced by a year when performance has been largely driven by income."

Performance in the property sector as a whole has just about nudged positive territory over the last volatile year, up 1 per cent, outperforming the wider investment company universe by some 5 per cent.

The sector has recovered strongly since the lows of 2008, on average up some 54 per cent over three years to the end of October 2011, compared with a wider industry average of 49 per cent, but the five-year figures are in negative territory. However, one of the longest established property investment companies, TR Property, has produced impressive returns of 286 per cent over 10 years, compared with the investment company average of 112 per cent. It has a dividend yield of 3.9 per cent and invests in property securities.

The closed-ended structure of an investment company is often seen by managers as a superior way to hold a portfolio of property, and this is particularly the case when investing in physical property. This is largely because the fixed number of shares means that managers are not forced to sell good stock in order to meet redemptions when markets fall.

There are five AIC property sectors containing 17 companies; these invest in properties ranging from UK commercial property to redevelopment opportunities in Macau, therefore giving investors exposure to a wide range of investment propositions.

It has been a challenging five years for the property sector, but with a difficult global economic backdrop, and in the midst of a eurozone crisis where many wealthy overseas investors may be looking for the relative reassurance of bricks and mortar, commercial property is attracting increasing amounts of attention. It will be interesting to see where discounts in the property sector are standing in another year’s time.

For more information visit the AIC’s website, where you can search for statistics and information on individual companies and sectors, as well as find a wealth of up-to-date market news and investment company factsheets.

Annabel Brodie-Smith is communications director at the Association of Investment Companies (AIC). The views expressed here are her own.