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A look at commercial property
March 20, 2017
Property investment has become increasingly popular as investors recognise the diversification benefits that property can bring to a portfolio. Traditionally, the reaction of property prices to economic changes tends to differ from that of equities and bonds. This disparity in performance helps to smooth out peaks and troughs in a portfolio, thereby reducing its overall risk.
Generally, when the economy is doing well, property performs well. When we are earning more money and feeling reasonably secure, we not only buy larger houses but also spend more on retail goods, encouraging companies to invest in larger premises. However, one of property’s key problems is its lack of liquidity: it is difficult to sell or buy a property investment quickly. It takes time to draw up legal contracts and undertake all the checks involved in the sale or purchase of a property, not to mention the costs involved in moving.
Although it behaves differently to shares or bonds, an investment in property offers rental income that is similar to the interest payments generated by bonds. Property can also offer potential for capital growth, and increases in rental income if prices go up. There are, however, significant differences between commercial property and residential buy-to-let. For example, leases on commercial property are longer – meaning greater stability of income – and the vetting of tenants is generally more detailed, reducing the likelihood of rental default.
The global commercial property market has become more transparent, as companies make more information available (either voluntarily or through increased levels of corporate governance). Moves to improve the regulatory aspects of the industry should also prove positive for investors. In particular, the UK has proved attractive to foreign investors, due to its central position between New York and Asia, and its reputation as one of the centres of the financial world.
For the average investor, buying property over and above the residential home is often beyond their means. However, there are numerous diversified collective investment funds that focus on property. These offer investors the opportunity to gain exposure to a selection of properties, providing access to a key asset class whilst removing the risks associated with direct investment in a single building. And it is worth remembering that investors can use their annual ISA allowance to invest in relevant funds, ensuring that their capital gains and dividend income will be tax-free.