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Property funds return to favour but don't fear a bubble yet

Property funds return to favour but don't fear a bubble yet

After falling dramatically out of favour during the financial crisis, commercial property funds are once again winning the hearts and minds of investors.

According to the latest statistics from the Investment Management Association, during May 2014, UK investors ploughed a massive £491 million in commercial property portfolios, making them the most sought-after fund type during the month.

The latest sales tally marks a hefty 290% rise on the £126 million invested during the same period in 2013 and is the highest the sector has achieved since December 2009.

It is, however, a far cry from where the sector was some years ago. Following a prolonged period of strong returns, investors in their masses wanted a piece of the action and during 2006/07 invested a total of almost £5.7 billion, only to witness the property sector fall off a cliff when the credit crunch hit.

In the period between June 2007 and July 2009, UK commercial property values collapsed by more than 44%, according to the main monitor, the IPD UK Monthly index – the steepest decline recorded since its analysis began. Given the illiquid nature of selling bricks and mortar – as opposed to shares – many commercial property fund providers were forced to introduce temporary lock-ins to halt withdrawals.

But on the back of the UK’s economic rebound, the sector has performed well, helping to further drive up its appeal. Over the past 12 months, the average portfolio has achieved a return of 5%, outpacing the typical global equity fund, up 3% and comfortably surpassing global bonds, which have lost 2%.

Given the reinvigorated backdrop, Aviva Investors upped its 2014/18 UK commercial real estate annual average total return forecast from 6.5% to 8.9%. Chris Urwin, global research manager of real estate at the firm, said: ‘Real estate still remains attractively priced relative to other income-producing assets and we expect capital growth to remain strong in the near term. Under our base case economic scenario, the prospects for returns in 2015 also look strong.’

History often dictates that when an asset class becomes ubiquitously popular, it is time to sell. But Patrick Connolly, certified financial planner at wealth manager Chase de Vere, does not believe there is reason to worry, at least not yet.

‘We remain quite positive on bricks and mortar funds. But when property is performing well, a lot of cash flows in, and this in itself can cause problems as many fund managers can be sitting on a lot of money and be struggling to find value. Increased cash holdings can dilute returns too,’ he said.

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