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The Property TurnReports Mark Hoskin, 21st August 2009It maybe time to re-weight portfolios towards commercial property. In the period up to the end of 2007 investors and advisers poured money into this sector and valuations rose well above the long term averages. With yields on properties falling below bank interest rates in 2007 investors did not seem to be taking into account the many risks associated with commercial property. The recent downturn has made investors well aware of the pitfalls - Zurich Assurance's popular Sterling property fund is down 32.6% over the last 3 years. The stress in the property market is not over yet. A recent study by the Royal Institute of Chartered Surveyors (RICS) reported that the number of distressed commercial properties coming to the market rose in every region of the world in the second quarter of 2009. The RICs report said that despite low interest rates, the number of distressed transactions is set to rise in 2010 as landlords struggle either to refinance debt, or meet income covenants. But in the face of this property investment trusts have seen a turn in their fortunes, with a closing of the difference between the share price of investment trusts and the net asset value of the property the trust holds (known as the discount). While over three years the ISIS property trust remains down 27% and the TR property investment trust down 19%, in the last three months these funds have risen 33% and 22% respectively. So what has changed? There are many factors which impact on property values - supply and demand, the availability of debt finance, the outlook for the economy, interest rates and all importantly sentiment. With interest rates so low across the world, investors today face two major problems how to achieve a sustainable income, whilst protecting the capital against the spectre of inflation. Given that the world's governments seemed to have avoided the collapse of the banking sector and with valuations back on a more even keel, perhaps now is the time to re-weight towards commercial property. Commercial Property is an asset class which has been able to provide income today, with protection to capital from inflation over the longer term.
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