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Yield-hungry investors look to property
by James Smith on Dec 27, 2012 at 07:00
’The key facts are long income property underperforms where rising gilt yields reflect expectations for a stronger economy and where the economy is operating at near full capacity,’ he says.
‘Conversely, it outperforms or matches All Property returns where higher gilt yields reflect a rise in investor inflation expectations, though not when inflation exceeds caps on indexation of leases.
‘In addition, given the depth of the economic crisis, interest rates and UK government bond yields look set to remain low for a long period, making any sharp upward pressure on property yields unlikely in the short to medium term. We expect the current flight to quality to be maintained during this period of economic uncertainty.’
Among advisers and wealth managers, appetite for property is yet to return in any great capacity. Mark Dampier, head of research at Hargreaves Lansdown, has been a long-term cynic on property and sees little reason to rush into the sector at present.
‘Although funds are still yielding in excess of 4% in many cases, no one is quite sure whether banks have started offloading excess property from their balance sheets,’ he says.
‘If not, that could be a large anchor weighing on the sector for many years to come. Banks still have more than £210 billion exposure to UK commercial property, with nearly a quarter of loans in breach of terms or default. More than half this debt has to be repaid by 2016, with around £50 billion due to mature this year.’
On the wealth side, Tom Becket, chief investment officer at PSigma Investment Management, currently has no exposure to UK or global commercial property, seeing little value within a wider portfolio.
‘The only justification we can find for property funds is diversification but we are against diversifying for its own sake,’ he says.
‘There are also better yield opportunities in high-yield credit and global equities, particularly after you take into account the charges and taxes applicable to property funds.’
Broadly, Becket is avoiding property globally as he believes yields do not compensate for the liquidity of the underlying investments within the Reits or the Reits themselves.
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