The western European commercial property sector enjoyed boom conditions from 2000 to around 2007 with cheap and easily accessible funding fuelling an investment spree. Strong returns came from high occupier demand underpinned by seemingly robust and sustained economic growth.
However, the crash that began in 2007 was spectacular and a dramatic loss of investor confidence slashed capital values in the UK by almost 50%. The descent into recession was further accelerated by contracting occupier demand increasing vacancy rates and forcing down rents.
Property has long been a favourite with private investors. Unlike many other types of investment funds, property is a tangible asset. You can see and touch your investment and while property valuations can fluctuate, the property is still there. Many private investors feel that they understand property better than other investments because they think it’s similar to buying their own homes. Institutional investors, such as pension funds and life insurance companies, do not have the same romantic view of property and investing in this sector has been seen as unexciting partially because of its relative stability. According to ITEM, 20 years ago the average commercial property holding in pension funds was about 13%. By 1999 that had fallen to just 4% because new tools like financial spread betting made the booming equity markets a much more exciting and lucrative proposition.
Looking purely at annual returns, UK equities consistently outperformed UK property for most of the 1980s and 1990s. However, commercial property has been rediscovered as an investment category and an attractive item in any fund supermarket in the wake of tumbling share prices. Although concerns remain over the shorter term for investors in the UK commercial property market, property has begun to seem attractive again compared with other asset classes. Many sources suggest that lack of supply even for a dwindling demand means that the central London office sector will see the most rapid rental growth over the next five years, delivering total returns of 9.4% per year compared to returns of 8.6% from the industrial sector and 8% from the retail markets. So although property will probably not see spectacular growth its diversification attributes and ability to offer long term investors relatively attractive yields remain good reasons for it to be part of a balanced investment portfolio.
