Commercial property has long been a popular option for investors looking for an alternative to company shares and bonds. Offices, shopping centres, warehouses and factories can offer a good, steady income from rental yields.
It should never form more than a small part of a portfolio but putting some money into bricks and mortar can be a valuable way to diversify your investments.
However, commercial property companies that invest in these buildings, are having a torrid time at the moment. Offices and shopping centres that looked like a good bet in the pre-Covid world have lost value as many people are still working from home and shopping online.
Delivery warehouses were rising in value thanks to the growth in online shopping. But values have plummeted as investors fear consumers will rein in their spending as the cost-of-living crisis bites. Market jitters grew earlier this month when Amazon announced it had acquired too much warehouse space too quickly.
Looking ahead: Fund managers and analysts are divided over which are the best bets in the current climate
But as values tumble, some experts believe some good buying opportunities are emerging.
Max Nimmo, property analyst at broker Numis, calls the current situation ‘a once-in-a-blue-moon scenario, where high-quality assets can be snapped up at huge discounts, if you find the right portfolios’.
‘The baby was thrown out with the bathwater,’ he says of collapsing property company valuations.
Investors looking for a commercial property fund or company will have to tread carefully as they vary wildly in make-up. They may include investments in industrial estates, giant warehouses, shopping districts, offices, or even hospitals and GP practices. Some invest in just one region, while others focus on a specific type of property.
Fund managers and analysts are divided over which are the best bets in the current climate.
Calum Bruce, manager of the Ediston Property Investment Company (EPIC), is free to invest in many different types of commercial property within his fund, but has recently been moving money into out-of-town retail parks, where he sees the most value.
‘Although all retail sectors were hit hard by lockdown, retail parks came through it in much better shape than the traditional high street,’ he says.
‘Now, the outlook for the sector is increasingly bright. Retail parks offer convenience to the customer, but they are better for retailers too as they offer more, adaptable space at considerably lower rents.’
Nimmo believes there is value to be found in office buildings, but only in those of the highest quality. ‘Companies are recognising that they need to be in the best quality space if they want people to come back to the office,’ he says.
‘It’s got to be somewhere that people want to go.’
Darius McDermott, managing director at Chelsea Financial Services, is more nervous about shopping centres and offices and prefers care homes, supermarkets and warehouses as long-term bets.
To spy the best opportunities, investors in commercial property will need to make their own decision about how they think these long-term social trends will play out in the coming years.
Some of the most popular property investment companies are currently trading on huge discounts. This means that you can buy shares in them at a lower price than their underlying holdings are worth.
Oliver Brown, at investment firm RC Brown Investment Management, mentions The Tritax Big Box fund, which is the UK’s biggest investor in logistics warehouses.
‘It currently has a nine per cent discount and its dividend yield is attractive and growing,’ he says. The company’s share price is up by nearly 50 per cent over three years, even after a near 18 per cent fall this month. Nimmo likes Segro, another giant fund which invests in warehouses. ‘It is currently trading at a three per cent discount, and has a good income yield,’ he explains.
McDermott suggests that if you don’t want to pick a particular investment company, you could buy shares in a fund that invests in a number of them. BMO European Real Estate Securities or Cohen & Steers Global Real Estate Securities are two options that invest in a range of different commercial property assets. They have returned nine and 18 per cent respectively over three years.
Another way to invest in commercial property is through funds that aren’t listed on the stock market. However, these can come unstuck if a lot of investors try to take their money out at once. Property is hard to sell at short notice so funds can ‘gate’ or prevent investors from taking out their cash if necessary.
Many property funds were gated during the pandemic. Janus Henderson’s Property Investment Fund did the same again recently and has now announced it is liquidating the fund, returning cash to investors once it has sold the properties within it.
In contrast, real estate investment trusts, such as Tritax Big Box and Segro, do not have this problem. You buy shares in the investment trust, which in turn buys and sells commercial property. That means that if investors ditch their shares at once, it hurts the share price but doesn’t force the fund manager to sell properties in a rush.
However if you invest in commercial property, there may be lucrative opportunities, but you need to be prepared for a few tricky years. No one knows for sure how our shopping, working and healthcare habits will pan out over the long term – and in the meantime commercial property faces a bumpy ride.
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