The economic recovery under way in the UK has helped to instal confidence back into the life of commercial property.
This sector has suffered a period of stagnation brought about by the financial crisis as the banking industry withdrew lending, retailers were pushed into bankruptcy and rental agreements were restructured downwards.
As the economy picks up and with unemployment under control, investors need to assess this sector for its income potential and the opportunity for some long-term capital growth.
Back in May 2013, the yield on gilts reached a record low as fear stalked investors’ minds. Growth in the UK appeared elusive and at best sluggish as investors rushed into the safest of assets, pushing down the income returns or yield. Commercial property outside London and the south-east corner of the UK was avoided, producing lower prices as investors stayed away – and yet the income return from these regions was delivering high yields.
The yield available was superior to all other asset classes, including high-yield or so-called junk bonds in the highest risk section of the bond market.
Investors should do some digging around when seeking out investment opportunities in commercial property.
To spread the risk, the best policy would be to use a collective investment vehicle such as a unit trust or a listed company.
The price of unit trusts exactly reflects the underlying or net asset value of the fund portfolio, whereas the value of shares in investment companies or trusts is determined by supply and demand and can be lower than the underlying value – known as trading at a discount – or higher (trading at a premium).
Another factor to be aware of is that a listed company structure will be able to take on debt – a commercial mortgage – which can enhance the potential returns.
Investors need to consider how long they wish to invest for as selling may be difficult in the future.
A listed property company will be traded on the stock exchange and the structure of a unit trust means it will be subject to daily, weekly or monthly trading – a look at the small print may indicate any lock-in periods.
The income received by investors can be by way of a dividend and/or a property income distribution, with the latter paying a gross sum which will result in a lower amount received for taxpayers.
Sheltering the investment within an individual savings account (Isa) would be an advantage for these taxpayers.
It is important to understand the type and geographical spread of properties being invested in.
A single asset class such as high street retail shops increases the risk, compared with a diversified portfolio across retail, office, distribution and industrial properties.
Any suitably qualified investment manager or adviser will provide potential investors with information.
It is also important to always remember that investments and income arising from them can fall in value and you may lose some or all of the amount you have invested.