One threat facing investors at the present time is increasing inflation. It has already risen to almost 3%, and is forecast to move higher over the medium term. At least part of the reason for this is Brexit, with a weaker pound being the symptom of declining business and investor confidence in recent months. This reduced confidence has caused some uncertainty within the UK property market. Despite this, it could be a sound place to invest, with these two investment trusts offering high yields for income investors.
Improving outlook
The F&C Commercial Property Trust (LSE: FCPT) reported its half-year performance on Wednesday. The company’s net asset value total return for the six month period to 30 June was 5.1%. The ungeared total return from the property portfolio was 5%. This compares with a total return of 4.6% from the MSCI Investment Property Databank All Quarterly and Monthly Valued Funds.
According to the update, the commercial property market has now readjusted following the EU referendum. Capital values are now above pre-referendum levels, with both capital and rental growth positive throughout the period at the all-property level.
The market has been aided by overseas buying in London, as well as through local authority purchases. Although the general election was major political news, it does not seem to have had a significant impact on demand. While investors remain cautious about the UK economy and the commercial property sector, its overall outlook remains relatively upbeat according to the update.
Inflation-beating potential
Investment trusts such as the F&C Commercial Property Trust and the Schroder Real Estate Investment Trust (LSE: SREI) could help investors to overcome higher inflation. They have dividend yields of around 4% before fees, and this is considerably higher than the current inflation rate of 2.6%.
Both trusts could benefit from improving rental income, with them offering a diversified exposure to a range of UK commercial property assets. And since rents could increase at a faster pace than inflation, there is scope for an already inflation-beating income yield to at least keep pace with the rate of price increases over the medium term.
Risks
Certainly, there is scope for a slowdown within the sector. Consumer confidence may decline due to inflation being ahead of wage growth. This could reduce demand for retail space and lead to reduced upward pressure on rents. Likewise, falling business confidence may hurt office assets in the same way.
However, with interest rates expected to remain low and Brexit negotiations still being in their relatively early stages, confidence among businesses and consumers appears to be more buoyant than many investors had expected. Commercial property remains popular at the present time according to today’s update from F&C, with its income-producing capacity being popular. This situation may remain in place and could lead to a narrowing of discounts or an extension of premiums in the sector. As such, now seems to be a good time to buy the two investment trusts for the long term.LSE:
