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Yield-hungry investors look to property

by James Smith on Dec 27, 2012 at 07:00

‘In a property market where total returns are likely to be dominated by rental income, a sustainable high income yield will make a big contribution to future property returns.’

Apart from income, Jordison also highlights another long-touted advantage of property, namely as a valuable portfolio diversification tool.

‘Historically, commercial property returns have tended to have a low correlation with returns from equities and bonds, because the asset class does not necessarily react to market or economic conditions in the same way,’ he adds.

‘Within the property asset class itself too, there is significant scope for diversification because each sector has its own drivers and opportunities, while different locations, property types and tenants provide further opportunity to spread risk.’

Elsewhere, Aberdeen analysis highlights UK property as marginally overpriced at present but the group points to assets let on long leases to secure covenants as a particularly attractive income alternative to governments bonds, index-linked paper and cash.

John Danes, director, property research, at the group, says the differential between long-let property and government bond yields is at close to 20-year highs.

‘Bond-like property with rental growth tied to inflation is also attractive in that our inflation forecasts are significantly higher than our forecasts for open market rental growth for commercial property as a whole over the next five years, so income growth should also be stronger,’ he adds.

‘The most attractive long income property types are supermarkets in particular, but also infrastructure and social housing,’ Danes says. ‘There are a variety of attractive alternative forms of long income, but it is imperative to ensure we are adequately compensated for the key risks of covenant strength and potential over renting.’

Lower returns from secure income

A risk of investing in long, secure income is that such properties are typically low yielding versus higher risk, shorter income assets with weaker tenants. As a consequence, Danes says capital values could be seen as vulnerable to a rise in yields from the current relatively low base.

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