Traditionally, investing in commercial property has been the domain of big corporate investors – but now lenders are offering a variety of products to suit the smaller, private investor. Adrian Morrison reports
Much has been made recently of the performance of property as an asset class compared to equities. But while institutions have been increasing the property weighting in its portfolios, little has been done to improve access to commercial property investment for the smaller investor.
It is generally thought that the liquidity – or illiquidity – of commercial property does not give smaller investors enough flexibility to move their money quickly. This, coupled with property fund managers’ infatuation with attracting institutional money, has left a limited range of options.
But although investing directly in property is not possible for most, more indirect investment vehicles are appearing on the market. These make it possible for minnows to invest in commercial property alongside the bigger fish with sums as small as £5,000 in some cases.
Property pension fund
These products include pensions, such as Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSAS). They allow investors control over what asset type their funds go into. In addition, there are unit trusts, property ISAs, and, of course, buying shares directly in property companies.
Chartered surveyor Montagu Evans offers a pension product to individuals with a minimum of £20,000 to invest. The eponymous Montagu Evans SIPP is a property pension fund that allows the investor to identify the properties his or her money will go into.
It is operated jointly by Montagu Evans, Bank of Scotland and James Hay Pension Trustees.
Managing partner of Montagu Evans’ Edinburgh office, Peter Lowrie, says: “When we first launched the SIPP obviously there was a lot of initial interest because of the novelty factor, but now we are increasingly receiving inquiries from individual investors worried by the performance of their pension fund in the stock market.
“However, individual investors are becoming more astute and even if the stock market was performing better than it has been, I believe more people would be looking at alternatives. Equities and bonds offer no real control over their investments and they have little idea what their fund managers are doing with their money.”
This increased interest from smaller investors is borne out by the experience of Property Link (half owned by the parent company of Estates Gazette), which offers an online introduction system and an investment newsletter for property firms and individuals.
Response rate
EGPL’s managing director, Richard Pawlyn, oversaw a mailshot recently to 6,000 independent financial advisers offering its services. The anticipated response rate to such cold-calling is 1% but this particular promotion saw a 4% response. Pawlyn believes this is because IFAs are responding to demand from their clients, who want to invest in commercial property.
“The IFA market is desperate to place commercial property investments with well-heeled investors,” says Pawlyn. As a result of this interest from beyond the normal institutional investor, one of the properties listed with EGPL is being amended to allow percentages of the building to be offered.
In addition, the traditional route to property investment, buying residential property to let, no longer seems attractive as the market is perceived as saturated. Income and capital from commercial property, on the other hand, has outperformed equities and gilts over a five-year period.
According to the Investment Property Databank, total returns for all property were 12% for the five-year period to 31 December 2001, compared to 9.8% for gilts and 7.3% for the FTSE All Share index over the same period. In addition, property yields are outstripping the other two asset classes. Average commercial property yields currently stand at around 6.5%, compared to 4.5% for gilts and 2.4% for equities.
Some property unit trusts give smaller investors the opportunity to invest indirectly in commercial property, although most actively seek institutional investment. One such product is the Lothbury Property Unit Trust managed by Atlantic Fund Managers.
Lothbury is a £310m ungeared fund of 50 investments spread throughout the UK. Growth is achieved through active management of the portfolio, and although it is targeted at institutional investors, the minimum investment of £80,000 is within the reach of many smaller investors.
Chief executive of Atlantic, Simon Radford, has noticed a definite shift of interest toward commercial property on the part of smaller investors, and expects this to continue.
He states: “We have been focusing on the institutional market, which understands that product, but are beginning to see a broader interest from IFAs and also from private banks looking to offer this facility to their clients.”
He maintains that 2002 saw a particularly high level of enquiries, as a wide variety of new customers appraised the market. “I see this continuing to happen in the future. People are beginning to realise that the stock market is not going to bounce back – they are looking at property as part of a long-term investment,” he adds.
If the experience of Scottish Widows is anything to go by, property ISAs might prove the easiest way for people to invest in commercial property. The pension and assurance company launched its UK Balanced Property Trust earlier this year and was highly oversubscribed.
“They put together a portfolio of a few hundred million pounds, put that into a new fund, and put that into an ISA,” says Cushman & Wakefield Healey & Baker’s Brian Laxton.
He continues: “That went particularly well and it now has plans for another version of that for a second group of properties.”
Close Brother Investment is offering a similar, but smaller, ISA investing in commercial property throughout the UK. The majority of the fund – 70% – will be invested in industrial property, with the remainder in office and retail and a small amount in residential.
But for the small investor this fund is ideal as it is registered in the Isle of Man and only requires a minimum investment of £5,000.
Buying shares in property companies has always been available to the smaller investor. In October the FTSE Real Estate index ended the month with a 7.37% rally. However, this was after a fall of 8.1% in September.
It is unlikely that the share price of a property company is directly indicative of commercial property as an asset class. But nevertheless some commentators are talking of the best years of commercial property investment as already in the past.
Speaking at the Real Estate Economic Summit, co-hosted by law firm Berwin Leighton Paisner and Estates Gazette, Anatole Kaletsky said the immediate future of commercial property would be “rather less interesting”.
Economic commentator
The chief economic commentator of The Times believes that property is only viewed favourably while other assets are struggling.
In addition, the fact that limited partnerships cannot float on the stock market is a peculiarly British idiosyncrasy, which prevents greater access to a tax transparent and liquid commercial property vehicle.
But the consensus seems to be that this trend toward commercial property will continue, at least for a couple of years, as equities continue to underperform.
“We see an opportunity for a broader base of private investor who wants property as part of a long-term investment plan,” says Atlantic’s Radford. However, he warns: “It is not for the short-term investor.”
