Commercial Property Investment

Commercial Property Investment
Need Wealth Management Advice? Just ask Local Wealth Managers Vision IFP for Assistance »
Until recently, investing in commercial property was the preserve of institutions with deep pockets. Private investment tended to focus on residential property, as evidenced by the growth in the buy-to-let market in recent years. However, whereas returns from residential property have largely been the result of rapid increases in capital values, a significant proportion of UK commercial property returns are derived from income. This return tends to be more stable as commercial property tenants usually commit to longer-term leases than residential tenants and are typically liable for any repairs to the property. Property investment offers other advantages such as:

* Diversification. Whereas the returns from both equities and gilts are strongly correlated, commercial property is negatively correlated. This diversification can be an important part of a multi-asset investment portfolio

* Low volatility. The returns from commercial property tend to be less volatile than other asset classes such as equities. This stability can be an important to more risk-averse investors.

* Tangible asset. Unlike other asset classes, property is tangible. Some investors have an instinctive preference for an asset that is made of “bricks and mortar” that can be viewed, visited or driven past.

* Asset management. Commercial property provides opportunities to add value through active management. By working closely with tenants the property manager can pursue initiatives that would enhance the value of the property and generate higher returns.

* Performance. Property has been the best-performing UK asset class over five and ten years, outperforming equities, gilts and cash. Over the last 25 years property has shown an annualised return of over 10%.

It is important to recognise that the UK commercial property sector can itself be subdivided into different categories; namely, offices, retail and industrial. These sub-sectors can be further categorised according to their own unique risks and sub-sectors can be further categorised according to their own unique risks and rewards. Niche sectors are also available for investment where only a handful of specialist managers operate. Commercial property can also be geographically sensitive as local economic environments drive demand. A good example of this is the office market, which is skewed towards southeast of England with a particular concentration in both the City and west end of London.

Specialist investment managers have reacted to increased demand for property from private investors over the past few years by designing investment products that enable private investors to access direct holdings in property. As a result, property has now firmly established itself as an important asset class in it’s own right.

Private investors can now invest in commercial property through a range of different fund types, ranging from traditional UK authorised unit trusts to offshore investment companies and syndicated partnerships. Tax-efficient structures are also available to allow tax-exempt investors, such as self-invested personal pensions (SIPPs) and small self-administered pension schemes (SSAS), to invest with minimal tax leakage. When creating suitable product structures, features such as liquidity, gearing, diversification and tax efficiency will be important considerations.

« Discretionary Portfolio Management

Exchange Traded Funds »