Don't expect commercial property to continue booming in 2010.
Investors are falling over themselves to buy property again, making it the second most popular investment sector in December, and the fourth for 2009 as a whole. It is easy to see why, what happens next is not so obvious.
Commercial property was one of the last sectors to fly out of the blocks last year, attracting Johnny-come-lately investors who missed the dramatic March bounce. Those who got their timing right may even have made up for their spring disappointments.
The average property investment company is up a mighty 52% over the past 12 months in share price terms, with most of that increase coming in the last three months of 2009, according to the Association of Investment Companies (AIC). This included a dramatic narrowing of the average discount, from 42% to just 2%. Some funds had a rip-roaring time, notably Invista Foundation Property Trust (LSE: IFD) and ING UK Real Estate (LSE: IRET).
None of which delights me, since I missed out on all the fun.
Commercial success...
Many private investors will also have missed out on the party. December wasn't the time to pile into property, June and July 2009 would have been much more sensible. So what about February 2010?
You won't be surprised to hear that many property fund managers believe they can continue to make hay into spring and beyond. Marcus Phayre-Mudge, manager of TR Property Investment Trust (LSE: TRY), confidently claims that the period of growth and improved sentiment towards property is set to continue.
His comments appear in a new release from the AIC, which handily assembles sector forecasts from a series of leading property fund managers, but when you read between the lines, it is clear that many believe the fun and games are over for now.
... or commercial flop?
No fund manager ever claims it is going to be a rotten year for their investment sector, no matter how dismal the outlook. Instead, they say this will be "another interesting year", "pricing movements are likely to be far more subdued" or "there are still risks to a straight-line recovery", which is exactly what these property fund managers are saying.
In trying times, managers reassure investors by claiming there will still be opportunities for clever stock pickers and asset managers (they mean themselves). Or they talk in vague terms about selective opportunities, balanced portfolios and taking the long-term view.
That is exactly what property managers are saying right now. In other words, this year is likely to be a toughie, but please don't let that put you off investing in my fund.
Bricks and mortar and pipelines
The fourth-quarter property sector rebound was exactly that, a rebound. The sector had fallen 40% over the previous two years, after credit availability and buyer interest was crunched. The recession has also squeezed rents.
Then a wall of liquidity hit the sector, driving values upwards to the point where even retail investors finally woke up and pay attention. You don't need telling that this is never a good time to invest.
Nobody is claiming that property will repeat its unprecedented recent growth, so if you're looking for a swift return, please look elsewhere.
Personally, I think the sector will be in for a shaky year (as will many other investment sectors). Commercial property isn't immune to the troubles facing the wider economy. Without strong occupational demand, rents will fall. And with more business losses and bankruptcies in the pipeline, I suspect that is quite likely to happen.
On the plus side, interest rates are likely to stay low. Unless inflation returns, and I'm still not convinced it will, base rates could stay low for years, that's how weak the UK economy is. We have all seen what low interest rates do for property values.
Yield, sir.
I'm not totally ruling property out. There is a big commercial property-sized hole in my portfolio, and one day I'd like to fill it. I missed my opportunity last year, and knew I was making a mistake at the time.
The sector offers the pleasures of diversification, and real estate yields look attractive compared to the returns on cash. If cash remains clown for some years to come, then commercial property could prove a wise move.
Even if you are one of those who is concerned about inflation, property funds can help you hedge through demand-driven rental growth, and cash flow from rental income streams.
During these volatile times, I'm watching the property sector like a hawk. If the recent surge turns into a dip, and discounts start widening again, then I will swoop to buy on weakness. Then I will pin my hopes onto those yields, and treat any growth as a bonus.
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