Investment Funds Turn Attention Back Towards Property

The global financial crisis scared many investment funds away from the property market, but now this is starting to be undone. With prices recovering and optimism for both …

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The global financial crisis scared many investment funds away from the property market, but now this is starting to be undone. With prices recovering and optimism for both the property market and the wider economy running high, many funds are starting to come back to this asset type, particularly in the commercial sector.

Paul Wilkes, who heads up Guernsey-based Collas Crill’s funds investment team, said "There’s been a definite upswing of investment in the UK market. Not as much residential – although there is some of that in major centers, primarily London – but more in commercial real estate." Wilkes also observed that, over the past six months, the level of return generally delivered by property investment has "really picked up speed."

After the UK’s property market was hit hard by the crisis, confidence in the viability of property as a useful new investment began to fade. Many funds decided it was best to simply steer clear of property. However, even a cursory look over recent headlines from major economic news outlets shows that confidence is once more returning. A look at price trends is even more encouraging, with London properties experiencing growth of 20% in the last year thanks to strong and growing demand.

In the opinion of Aviva, a major insurer and also a holder of significant commercial property interests, double-digit growth is expected to continue through 2015. While Aviva expects that growth to peak before this year draws to a close and then subsequently to ease off, it still expects its commercial property investments to see annualized growth of around 15% for this period.

The change is not entirely on the part of the property market, however. In a sense, this is a two-way shift. Properties are being perceived as a safer, more stable and more secure investment option than they have been recently, but at the same time investor sentiment is recovering from the financial crisis and many investors are willing to pursue slightly higher-risk opportunities.

Funds frequently prefer commercial property over residential alternatives because they, more than other types of investor, need to play the long game with their investment. Commercial property pricing tends to be less erratic than residential, and this is a boon for funds seeking long-term stability and reliability from their portfolios.

This is partly down to the length of many leases. JTC Real Estate Services Director Philip Hendy likens a lease of 20 or 25 years to the purchase of a bond. He also points to the fact that property interests are inherently asset-backed, unlike many other kinds of investment.

Many specific types of commercial property have benefited from the apparent recovery. Hendy points to supermarkets and shopping centers as good examples. At the same time, funds have been turning more and more attention to student accommodation complexes in recent years, attracted by a mixture of high demand and low supply.

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