A tell-tale sign that momentum is gathering for any asset class is a flurry of new fund launches.
After two years of falling capital value, the attractive yields available on selected commercial properties are tempting some firms to get in on the act.
Gerry Ferguson, a stalwart of the sector and manager of the Scottish Widows Investment Partnership (Swip) Property Trust, believes that rising capital value may not be too far off.
He said: “If we’re not at the bottom of the market we’re close to it, so we have started to put some of the cash in the fund to work.”
Mr Ferguson saw the asset-class returns of 18% a year in 2004, 2005 and 2006 as abnormal, particularly the 2006 return which was well above Swip’s forecast.
He said: “The market started pricing non-prime property as if it was prime.
“Now that distinction has returned, the value of prime property has started to stabilise or even appreciate slightly in some cases.”
The manager feels that a more realistic long-term average return from the asset class is 3-4% above inflation. Much of the total return derived from commercial property comes from the rental income, which is attractive to many long-term investors.
The practice of upwards-only rent reviews being included in leases is still common.
Mr Ferguson believed that this was a hot topic a couple of years ago, but it was not top of most tenants’ priority list at the moment.
“They are more concerned with being able to sub-let or having the right break options,” he said.
Mr Ferguson said there would still be problems in parts of the market and investors needed to be careful who they chose to manage exposure to the asset class.
He said: “You should look at the quality of the manager and the quality of the stock. We would regard the purchases that we have made recently as low-risk assets: they have financially strong occupiers, long leases, a healthy yield and are in areas where there is no obvious over-supply.”
The Swip Property Trust is down by 17.4% over the year to August 17, 2009, against a sector average loss of 21.1%.
Barry O’Neill is a chartered financial planner with Thomson Shepherd and can be contacted on 01224 619215