Performance of FTSE All Share vs IMA Property sector over 1-yr
Source: Financial Express Analytics
Rob Martin, head of research at Legal & General Property is one of these and says the recovery is likely to restrain commercial real estate rents.
"While investor confidence has returned to the commercial property market, Legal & General Investment Management (LGIM) believes the UK recovery in 2010 will be relatively weak compared to previous recessions. This is likely to restrain commercial real estate rents," he says.
"A move up the risk curve must be executed with a careful eye on the fundamentals of each asset. Put another way, whilst high risk premia offer unusually attractive potential for generating outperformance, it is the underlying quality of those assets that can turn that potential into reality," he says.
"Commercial real estate could produce excellent returns this year. However, in light of fragile economic growth figures released during the first quarter, the best returns will rely on good stockpicking of assets and a selective approach to taking on greater investment risk,” he adds.
According to data from Financial Express there are 38 funds within the IMA Property sector.
Performance of FTSE All Share vs IMA Property sector over 3-yrs
Source: Financial Express Analytics
Over a three year period to 7 May 2010 no fund in the sector posted a positive return; the best performing fund was the Threadneedle UK Property fund which made a loss of 9 per cent. The fund making the biggest loss was the SWIP UK Real Estate fund losing 63.14 per cent, with a risk score of 33.41 per cent. The Sharpe Ratio was a negative 0.10 per cent showing that investors were not rewarded in terms of return for the extra risk being taken on.
Over a one year period, the First State Global Securities fund was the best performer, returning 47.87 per cent and carrying 21.97 per cent volatility, making it one of the more risky property funds in its sector. However, the fund’s Sharpe Ratio was 2.24 per cent, showing that investors were rewarded for the risk that was taken on by the fund manager. The data also highlights the improvement in performance and risk terms to the sector recently.
Despite this James Thornton, fund director at Mayfair Capital says there the sector is still over 30 per cent down from its peak in June 2007.
However, he states sentiment has improved considerably and says it is evident that UK institutions are much more positive about the sector and are increasing their allocations to it.
Mickola Wilson at COBA Asset Management says the sector will see some growth in 2010 and 2011 but warns it will not be universal.
"The forecasts for the second half of 2010, 2011 and beyond show continued, if modest, growth in values and projected total returns of eight per cent to 10 per cent for the next five years. However, the growth prospects are not universal and some sectors will be adversely affected by a weakening demand from occupiers, which could result in high levels of voids and falls in rental values," she says.
Thornton says the best opportunities for the sector remain in London and the South East of England, which will continue their historic trend of producing above average UK GDP growth.
"London retail and office properties are beginning to show signs of positive rental growth. Away from this region however, where the economic recovery is more anaemic there is over supply of accommodation and land for development; and, as a result we become more bearish the further one gets from the South East," he says.
Looking ahead, Thornton predicts a 10 per cent plus total return for the property sector in 2010 and says this could be more if the demand and supply imbalance persists, which will mean lower total returns over the following period.
"With rental growth resuming in two to three years time, we believe that property will have the ability to deliver attractive real returns and income will be the dominant component," he concludes.