- Commercial property offers an attractive income yield. Rental yields have risen sharply since mid-2007 and they are significantly higher than yields on UK shares. Prime property yields are comparable with those from investment grade bonds. But while rental income and UK equity dividends have generally kept pace with inflation over the long term, income from bonds is essentially fixed.
- Property has also usually provided investors with growth. The historic experience is that property growth has more or less matched the average rates of inflation. In the very long term, the bulk of returns have come from rental income. Over the 25 years to the end of 2008, the average gross annual return from commercial property was 9.1% of which 6.8% represented income return, according to Investment Property Databank (IPD), the leading property performance analysts. Over the last 10 years to the same date overall returns were 7.4% a year, reflecting the fall in property values from mid-2007 after the strong performance up to that point.
- In the long term, commercial property has usually been a less volatile investment than shares. Partly this is because of the high proportion of the total return from property that is provided by income. But there are other factors, including the effect of long leases and upward-only rent reviews that still generally apply.
- The commercial property and equity market cycles are different. For example, while the UK and most other world stockmarkets fell between 2000 and 2003, the commercial property market produced positive returns. The inclusion of commercial property in your investment portfolio historically could have potentially reduced risk and smoothed your overall returns.Even in the difficult conditions of 2008, property out-performed the UK equity market.
- The commercial property market is very different from the residential property market. Institutional investors have largely avoided residential property because of the small lot sizes and high potential cost of management compared to commercial property. Although the buy-to-let residential property market has been popular with individuals, many such investors are over-exposed to this asset class, particularly once the value of their own home is taken into account.
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Investing in commercial property
02: The case for investment in commercial property
Commercial property is an asset class distinct from equities and bonds. Its main features are as follows:
The value of your investments - and the income from them - can fluctuate and it is possible that you might not get back a significant amount of your investment. Past performance is not a guide to future performance and may not be repeated.
