Could this bombed-out sector rise from the ashes?
Commercial property was blitzed by the credit crunch, and don't worry, you haven't missed out on the recovery yet.
I am often tempted to crawl into a bombed-out investment sector in the hope of cashing in when it starts rebuilding itself.
Anybody who burrowed into the banking sector in March will have been handsomely rewarded for their bravery. I thought about it, but didn't quite have the guts.
Several other ruined corners of the economy have yet to recover, notably commercial property. But it has been attracting more attention, so is now the time to sneak in while the ruins are still smouldering?
Hot property
George Shaw, manager of the Ignis UK Property Fund, reckons commercial property is ripe for a comeback. If inflation picks up, and many people fear it will, he says the sector's high, stable and secure income stream would look increasingly attractive.
He is not the only one talking up the sector. Anne Breen, head of property research at Standard Life Investments, claims confidence is returning, and says the UK is likely to spearhead any recovery, because it is furthest advanced in the global cycle. She believes commercial property could outperform cash over the next three years.
Their comments caught my eye, because I have been watching commercial property for some time, after making an ill-judged foray into the sector last year.
Bricks and torture
In February 2008, I bought investment trust TR Property (LSE: TRY) at 186p per share, on the rather flimsy basis that it had fallen more than 30% in a few months.
Two months later, I bought property firm Land Securities (LSE: LAND) at 1,469p per share, down from around £21.
My strategy was embarrassingly crude. I was buying them for one-third less than they cost just a few months earlier, on the shaky assumption that I must therefore be bagging a bargain.
I was wrong, because they had further to fall. I washed my hands of both stocks two months later, after they had dropped a further 10%.
Looking back, I was lucky, because I missed last autumn's spectacular collapse. TR Property now trades at a meagre 120p and Land Securities at 490p.
Although according to my investment strategy, this makes them better value than ever.
On the Reit track
I had learned a very basic investment lesson: even if something has gone down, it can still go down further. A lot, lot further.
But at some point, it has to go up again, doesn't it? And maybe that is about to happen.
The sector is certainly attracting growing interest from investors. A new property fund targeting distressed real estate assets, NewRiver Retail Capital Ltd, has just applied to join AIM. It hopes to raise up to £250m to capitalise on the sharp fall in capital values in the retail sector.
F&C Reit Asset Management is looking to raise up to £300m from institutional investors to snap up property bargains.
Signs of life at least.
Catching a falling market
Before you get too excited, there is still a huge overhang of commercial real estate on the market. Absorbing it all will take time.
Commercial property has just been through its worst ever slump, and it isn't necessarily over yet. Defaults are likely to rise, with £43bn of loans due for repayment this year.
Land Securities reported a 9.3% drop in rental values in the year to 31 March and has warned of further falls to come.
And even the relatively bullish Anne Breen admits that "returns are likely to come under further downward pressure in the next 12 months", which means it is only appropriate for longer-term investors.
So the news isn't great, but then, isn't that the point of a recovery play? The winners enter the market just before it reaches the bottom of the cycle, the losers leave it too late.
Construction time again
There is no need to panic, commercial property is unlikely to bounce back in the same extreme way as the banks did.
Even when the recovery comes, it is unlikely to surge 20% in a month, although it might over the course of a year.
But it certainly has a place in a balanced portfolio, and now is a far better time to buy than, say, the summer of 2007.
Don't expect a return to the turbo-charged days seen before 2007, when IFAs couldn't pour enough of their clients' money into commercial property. Things should be a bit calmer this time round, but maybe that isn't such a bad thing either.
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