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Can UK commercial property still provide an income shelter?

by Eleanor Lawrie on Jan 21, 2014 at 09:35

Can UK commercial property still provide an income shelter?

UK commercial property is being tipped to be one of the bright spots this year as it benefits from the improving economy and sentiment, as investors seek yield superior to that available from cash and government bonds.

The asset class has already rebounded considerably. In 2013, transactions in central London commercial property hit their highest level since before the bubble burst for the sector in 2007. This trend has spilled over into this year, with a queue of deals waiting to go through. Meanwhile, in its latest report, the Investment Property Forum forecast an average total return of 9.3% for 2014, up from an already strong 8.6% in 2013.

It seems the investment community expects this trend to continue, with the Association of Investment Companies (AIC) noting that in a recent poll, 10% of its members picked commercial property as the sector most likely to outperform in 2014, up from 3% at the market’s peak.

Ainslie McLennan (pictured), co-manager of the Henderson UK Property unit trust , notes the strong flows into the asset class in 2013 were driven by investors searching for income and stability, which remain key themes this year.

‘Interest should continue as a result of the sector’s strong fundamentals, namely solid levels of rental income and steady returns, at a time when other asset classes are likely to experience periods of volatility,‘ she said.

Fund manager Simon Gergel, who invests in property shares through the Allianz UK Equity Income fund and the Merchants Trust , agrees there are still opportunities in the asset class.

However, he argues investors have to be selective about which parts of the sector to go for, following its recent rally, and he favours industrial over retail property for 2014.

‘The thing we are worried about in retail is the structural changes going on in the industry,’ he told Wealth Manager.

‘There is less footfall on the high street and more on the internet. I think big shopping centres will be fine, as they are destinations people want to go to, but on the high street, trading is fairly poor.’

Last year, the strongest region for property was London. Transactions worth £19.9 billion took place in central London commercial property, the highest figure since 2007 and an almost 50% increase on the year before, according to real estate services firm Cushman & Wakefield.

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