High returns from the commercial property market

I have always been a property investor both in Malta and abroad. I am, however, concerned with the future prospects of the residential market with rising interest rates likely to slow down the market, especially in the UK. I would instead like to invest into the commercial property market but do not want to tie up my capital for long periods. What is the best way to do so and what are the benefits of this approach?

It is true that rising interest rates are likely to restrict property inflation in the short-medium term and we have seen this in both the US and the UK recently. The situation in Malta is somewhat different as interest rates and household mortgages are not the main driver when determining house prices. It is more down to the shortage of land.

Commercial property opportunities are often overlooked by investors as investing in such developments normally requires huge capital outlays, running into often millions of pounds. You can however access this booming sector by accessing property funds that pool investor's money and in turn own part shares in many very large developments across the UK.

The Norwich Union Property Trust for example has assets in excess of £3 billion in commercial property ranging from offices to shopping centres. The only practical way of investing in this sector is therefore to do so via this and other similar investment funds. On selecting your investment fund, you should be careful to check how much of the fund is invested directly into tangible property assets, that is, buildings and how much is invested into shares of property companies as the latter approach is higher risk.

If you are new to the commercial property sector then it is important to understand what exactly you are buying into. The most common types of commercial property assets are:

Retail - shop units selling commercial goods. This includes town-centre shops and out of town developments;

Office - company staff bases and general office space;

Industrial/warehousing - manufacturing plants and storage units.

Each has its own individual characteristic and will perform well at different times in the economic cycle.

There are a number of reasons to invest in this attractive asset class and the first is of course the performance. We have seen very strong and consistent performance compared to government bonds and equities. It has also delivered such returns with much lower volatility (risk). Commercial property has a bond-like element that performs well when inflation expectations fall, normally when growth is relatively slow. It also has an equity element that performs well in periods when economic growth is relatively strong.

Over the long term, the correlation of returns between property and both equities and gilts has been low, while the correlation between equities and gilts has been significantly higher. In other words, when equities and gilts are performing badly (as is the present situation), property is likely to perform well and vice versa.

Returns from these funds have been in the region of 12-18% over the last year. While there are no short-term signs of this changing, a forecast of 8%+ for the next 12 months is very realistic.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com

www.hollingsworth.eu.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.