Catching the commercial property upswing

When investment markets fall in value, there is a real risk that investors will leave and then fail to return in time to catch the upswing.

Equity markets, corporate bonds and gold have all rallied sharply during 2009. The Nationwide House Price Index published today even suggests that residential property might post gains this year.

For investors who moved to cash or gilts when the markets were crashing, they may have been hit twice - by falling markets and then by missing out on the rallies.

Henderson New Star published an interesting briefing note for investment advisers this week, describing the position of the commercial property asset class. This is one investment asset class which has been reluctant to participate in any upturn.

In fact, UK commercial property moved into positive territory for the first time in August, posting gains of 0.2%. This was the first monthly gain for over two years. During September, UK commercial property prices generated an average gain of 1.1% (according to the Investment Property Databank).

Do two months worth of positive data in an investment asset class signal the start of a sustained rally or are they simply a blip?

UK commercial property prices have fallen by 44% over the past two years. Any investor with exposure to this asset class in isolation within an investment or pension portfolio will be feeling a great deal of pain.

The good news for investors is that demand for UK commercial property now appears to be improving.

This is due, in part, to weaker Sterling making the asset class look attractive to foreign investors. With the pound 21% weaker against the euro, it is now possible for a eurozone investor to buy a UK property for less than half of what it would have cost in euros two years earlier.

Confidence also appears to be returning. The latest survey from the Royal Institution of Chartered Surveyors found members more upbeat in the third quarter in respect of UK lettings and investment activity.

The returns from commercial property are a combination of income (the rental yield) and capital appreciation.

Lower capital values means reasonable looking yields, particularly in comparison to low interest rates available on cash and low levels of price inflation. Yields on UK commercial property are now back to where they were in the 1990s and higher than they were in the late 1980s.

With all this positive news, some challenges remain.

Getting access to UK commercial property remains difficult, particularly with the banks continuing their restrictive lending practices. One option is to invest through collective investment funds, but investors need to pick these carefully in terms of liquidity, geographical diversification and tenants.