Commercial property: Expect returns of '10pc this year, and next’
Private investors warmed to commercial property funds in the years up to the financial crisis – and then suffered setbacks as values fell. Now the sector is bouncing back very strongly, analysts say
Commercial property funds are growing again in popularity on the back of strong recent returns – and some extremely upbeat recommendations from professional investors.
Wealth manager Equilibrium Asset Management, for example, expects UK commercial property (embracing offices, shops, factories and warehouses) to return more than 12pc this year. For commercial property funds – the easiest way for private investors to access the sector, see right – returns will be a lower, but still attractive, 10pc, Equilibrium said. The difference reflects the cost of managing funds and the resulting drag on performance.
“It’s a bold prediction, but we believe commercial property will deliver the best risk adjusted returns during 2014,” said Equilibrium’s managing partner Colin Lawson. “Returns could be better than the FSTE for a fraction of the risk. Property is strongly linked to economic performance, so the recent recovery in the UK is a strong 'buy’ signal in my view.”
He recommends investors holding 20pc to 30pc of their portfolio in this type of asset – “depending on their attitude to risk” – a proportion which is far higher than many other advisers would suggest.
He is not alone in his confidence. Aviva, the insurance giant which pours billions of its customers’ money into commercial property, issued a “UK Real Estate” outlook in which it says returns will be “very strong” and “in double digits” for each of 2014 and 2015, although returns will peak this year and start to tail off in the next, it predicts. It puts total returns for UK commercial property – that means rental income generated plus the growth in the value of the buildings – at about 15pc for 2014 alone.
Commercial property has only relatively recently become easy for small investors to buy into. In the early 2000s a number of major fund companies promoted commercial property unit trusts, which worked by massing investors’ cash together and then buying office blocks, shops and other properties.
Many did extremely well as the value of UK commercial property rose.
But the onset of the 2007 banking crisis impacted commercial property values drastically with sharp falls in the value of the buildings and the rents many could command. During the period 2009-12 much if not all the returns earned by commercial property came from rental income, and even this was not sufficient in some periods to generate an overall positive return as the capital values continued to fall.
Capital values started to creep back up only in 2012, according to sector analyst Investment Property Databank (IPD), with the trend gaining strength last year.
Brian Dennehy, financial adviser and founder of broker FundExpert.co.uk, agreed and said: “There is a belief that commercial property provides a growing income. But the reality is very mixed. Since the year 2000 income from property funds has barely changed, and it has not been a reliable source of growing income.”
Mr Maitland explained: “Over the very long term, returns on commercial property are driven by a high starting yield, some modest subsequent income growth, and capital growth.”
Commercial property should benefit from Government's National Insurance reduction
Up to 27,000 businesses in commercial property activities could benefit from a reduction of up to £2,000 from their employer National Insurance Contributions (NICs) bill.
The businesses will be able to benefit from up to £2,000 off their employer NICs bill - the tax that an employer pays for employees' entitlement to a State Pension - from April 2014 thanks to the Government's new Employment Allowance.
Available to all 1.25 million businesses and charities in the UK, over 90 per cent of the benefit of this allowance will go to businesses with fewer than 50 employees. Some 8,000 businesses in real estate activities paying NICs of £2,000 or less will see their employer NICs wiped out.
A business that employs one person on £22,400 will pay no employer NICs. A business employing five adults full-time on the national minimum wage will see their employer NICs bill reduced by over 80 per cent.
Available every year, the allowance will be simple to claim and easy to administer. Businesses will just have to confirm their eligibility for the allowance through their regular payroll processes and up to £2,000 will be deducted from their employer NICs liability over the course of the year.
Exchequer Secretary to the Treasury David Gauke said: "Small businesses are the lifeblood of our economy and we want to do what we can to support them. The Employment Allowance will reduce the cost of taking on new staff, supporting 27,000 businesses in real estate activities, and hundreds of thousands more across the UK with an ambition to grow, by reducing the cost of hiring their first employee or growing their workforce."
Landlords of 3 million people call for renewed ECO commitment
A group of landlords managing the homes of 3 million people across the UK have written an open letter to the prime minister voicing support for the energy company obligation.
Along with academics, contractors and others, they have praised its role in reducing energy bills and together they asked for David Cameron to renew his commitment to ECO1 and ECO2.
The letters affirms the impact ECO is having on reducing fuel poverty and the economic benefits of having insulation installed.
Andrew Eagles, managing director of Sustainable Homes said: ‘The current uncertainty over the future of ECO is already having a damaging impact as social landlords rethink their plans. Many of our members are becoming uncertain about this much needed investment. This will have perverse impact, increasing fuel bills and reducing employment.
‘We do not accept that measures such as ECO are the cause of increasing energy bills. Indeed they are in the front line of tackling fuel poverty and reducing its impact.’
Energy suppliers are obliged to help improve the efficiency of homes, with a particular focus on vulnerable people and properties that are hard to improve, under ECO.
The group includes the SHIFT best practice group and some of the largest landlords in the country and the letter highlighted thousands of projects the landlords were undertaking across the country to improve homes in some of our most impoverished communities.
The letter, dated yesterday, concluded with: ‘We ask that you take urgent action to recognise the benefits of investment in the housing stock by social landlords and retain and improve ECO 1 and ECO 2 for the long term.’