A new opportunity in the commercial property sector.
Investing in property can be a hit-and-miss affair, as anyone who has been through a house price boom and bust will attest.
Residential property is perhaps harder to predict, as so much depends on personal economic conditions, credit availability and sentiment -- such things that are hard to quantify. The commercial property sector is a little easier to put some numbers on, as we can examine the businesses behind it, see what kind of returns they're getting, and at least get a finger on the kind of property costs they can justify.
Unless you have the means to be buying office buildings and factories, the way in has been to buy shares in companies that themselves invest in and develop commercial properties -- just as you might buy a housebuilder rather than a house.
But now, there's an intriguing, and potentially Foolish, new way to invest in commercial property, in the form of FTSE UK Commercial Property Index Fund Limited, an investment trust that is set to be launched on the LSE's main listing.
It will track the FTSE All UK Property Index, which is a subset of the FTSE UK Commercial Property Index Series, and so will give investors a slice of a sector worth more than £60bn in commercial property.
Without such pooled investments, you'd have to go for something like Land Securities Group (LSE: LAND), or British Land (LSE: BLND), both of which operate as real-estate investment trusts (REITs), and develop and rent out commercial properties. With both being in the same business, and being similarly sized FTSE 100 companies (with market caps of approximately £5.8bn and £4.4bn respectively), we might expect similar investment performances.
But we'd be wrong.
Both are on fairly high price-to-earnings (P/E) ratings of around 17 to 19, and they each pay decent dividends (Land Securities around 4% and British Land 5.2%), but their share prices have followed very different paths. Over the past 12 months, British Land shares have lost more than 15% of their value, while Land Securities shares are about 5% down and pretty much in line with the FTSE.
The new investment trust
So what can we expect from the FTSE UK Commercial Property Index Fund?
As we are still at the initial announcement stage, we don't have a schedule or an anticipated flotation valuation yet, but the intention is to be fully invested within three months of admission to the stock market.
The flotation will be sponsored by Jeffries International, and the new company will be advised by MSS Real Estate, a current adviser to the FTSE index, whose chief executive Mark Ellis said about the new venture:
"We believe that the Company is a unique and innovative proposition for both institutional and retail investors seeking exchange-traded access to institutional grade, investable UK commercial property without the cash drag or gearing typically associated with commercial real estate investment. The Company expects to generate returns comparable to direct investment in a diversified, balanced real-estate portfolio and has adopted sector-leading discount control features."
The trust's strategy will be to replicate the chosen index, and it will try to achieve that by investing in property-based shares, REITs, bonds, unit trusts and other assets related to commercial property.
How might it do?
Early forecasts suggest it should be paying a dividend of around 3.5%, and any discount to net asset value (NAV) is set to be managed aggressively. With a policy of repurchasing shares should their price fall more than 5% short of their associated NAV for 20 consecutive trading days, the aim is to ensure the share price stays close to the value of the trust's assets, and that should reduce risk and volatility.
What about the index itself? Monthly reports are available as PDFs from the FTSE website, so it should be pretty easy to see how well the tracking target is achieved. A look at the latest report for March 2012 shows a flat and surprisingly non-volatile performance, which has come close to the FTSE 100 over the past 12 months, but without the big lurches.
It could prove to be a valuable index for those who want a long-term investment in property but without short-term volatility.
A Foolish investment?
I've spoken previously of my liking for investment trusts, so I won't repeat all that here, suffice to say that, with their accountability to shareholders and the absence of the conflict of interest that afflicts open ended funds like unit trusts (for whom investors and shareholders are two separate groups), I'm very keen on them.
And I've always supported the Fool's liking for index trackers, which outperform most managed funds over the long term.
So yes, this is one that I think Fools interested in commercial property would do well to consider. And it may well turn out that its managers have chosen their entry point pretty well.
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> Alan does not own any shares mentioned in this article.