Since early 2007 the IMA Property sector dropped by about half before recovering to a level some 35 per cent off its three year peak. However after more than two years of negative returns the sector is finally on its way to recovery, helped by a number of factors, the professional investors say.
Barry MacLennan, investment director, Standard Life Investments believes the recovery has been pushed by investors desperately searching for more income.
“In the third and fourth quarters of 2009, bonds were no longer as a compelling value. Portfolios were overweight in bonds and investors decided they needed to diversify. As property was beginning to trough at this time, more investors turned to this,” he explains.
James Tierney, managing director at Brighton-based Tierney Financial Services believes the yield for commercial property is attractive.
“For the first time in 10 years the property sector will reflect the stock market – the whole investment market is returning to where it was 10-12 years ago,” he says.
Global vs. UK property
MacLennan also points to increased interest from international buyers, who have helped boost the UK property market. He says international investors have taken advantage of the weak pound, leading to more sales to overseas buyers.
Fiona Rowley, manager of M&G’s Property Portfolio fund, agrees saying the UK market is cheap, as illustrated by figures suggesting that 50 per cent of buyers in 2008-2009 were international.
MacLennan believes there is a strong re-rating in UK commercial property ahead. More value can be had in the sector, although he is quick to add that the pace of turnaround will not continue.
“This turnaround was the strongest it has been in 23 years,” he says.
“Investors should not expect the same, but they should expect to see healthy low double digit returns.”
Due to the increased interest in property, MacLennan says there is now a lot of cash in property funds. As a result of this he says near term problems will be related to cash issues and urges investors to communicate with fund managers.
“Investors need to ensure they are actively engaged with property managers and ask them what they are doing with the cash that’s in the portfolio.”
According to MacLennan there is significant opportunity for commercial property in London this year, with demand set to outstrip supply.
“The difference in the last 12 months is extreme. Gone are the days when landlords were offering a certain amount of months rent for free in order to attract tenants. Landlords will be in a stronger position going forward and will be taking a tougher stance.”
However, Tierney is seeing investment further ashore and has his sights on New Orleans.
“It’s a typical American dream story; it’s gone from rags to riches in four years,” he says.
“It’s a really heart warming story of how the whole city has got behind the theme of a national vocal point and accepted that they had to knuckle down to make it work."