Commercial property back in favour

There are signs of a turnaround in commercial property as groups report rising valuations on their portfolios and money begins to flow back into the sector.

The New Star UK Property unit trust has started to see positive inflows as investor sentiment on the asset class improves.

Marcus Langlands Pearse, the director of UK property at Henderson New Star and the manager of the fund, says investors are starting to see commercial property as an attractive proposition once again.

“The whole diversification message is coming back so we have seen stronger inflows throughout August,” he says. “People have been looking at our valuations and seen that we’ve had three consecutive month-end valuations ticking up, which is the first time that’s happened since June 2007.”

Stephen Elliott, a property fund manager at Royal London Asset Management, says the key factor has been investors’ search for income.

“What’s driving it is where interest rates are. Most properties are yielding between 7% and 8% and that’s looking attractive,” he says.

However, he adds: “I think it’s too early to say whether this marks the start of a bull market.”

Over the two years to September 3, the Investment Management Association (IMA) Property sector has fallen 38.04%, prompting an exodus of capital from the asset class, particularly by retail investors.

Since the stockmarket bottomed in March, however, there are signs that the property bear market could be abating. In May, British-domiciled property funds saw positive inflows for the first time since April 2008 with net inflows of £2m.
Meanwhile, the M&G Property portfolio moved from a cancellation to a creation basis last week. The creation price represents the mid-price of a fund plus an amount added on to represent any dividends or uninvested capital and dealing costs.

A cancellation basis is where a group sets a lower bid price for a fund when there are net redemptions. Many property funds moved to cancellation pricing in 2008 when valuations in the sector plummeted.

Both M&G and New Star say most of the inflows coming back into the funds has been institutional and discretionary money. Fiona Rowley, manager of the M&G Property Portfolio, says there is international interest in British commercial property as it is currently presenting more value than other core markets.