29th October 2013 at 11:56am
The UK economy is showing signs of a broad-based improvement, which is feeding through to UK commercial real estate. Capital values finally increased in the second quarter of 2013, after falling for six consecutive quarters, and have continued to improve over recent months. Rental growth is increasing and we expect further modest increases as the UK economy improves. Therefore, after a difficult period characterised by lacklustre returns, real estate is once again coming back into focus for investors.
As we might expect, prime office and industrial sectors have led the recovery, while the retail sector has struggled. However, it’s not all doom and gloom for retailers, as data shows that
The closure of shops in the first half of 2013 was significantly lower than the comparable period in 2012.
the closure of shops in the first half of 2013 was significantly lower than the comparable period in 2012. In terms of location, Central London remains the preference for real estate buyers, although there is limited supply. As a result, we are starting to see evidence that the recovery is broadening out, with more sales activity and interest in regional markets.
While supply remains an issue in some geographical areas, we expect to see stronger total returns across a broad range of sectors. Overall, the Investment Property Forum, an influential industry body of property professionals, expects annualised returns of around 8% from UK commercial real estate. In addition, with a current yield of around 6%, UK commercial property is attractively valued given the low interest rate environment and compared to other income yielding asset classes. Looking ahead, the outlook for the asset class is positive, as surveys indicate the UK economic recovery is gaining momentum and the pipeline for new property remains relatively constrained.
Our multi-asset MyFolio portfolios are currently overweight in UK commercial property, investing in a number of managed property funds. Traditionally, property exposure as part of a multi-asset portfolio is non-correlated to other asset classes and can offer valuable diversification benefits. Property investment is also typically less volatile than other asset classes, while still offering investors the potential for both capital growth and yield appreciation. By investing in property via a multi-asset fund like MyFolio, investors can gain exposure to prime real estate opportunities that they wouldn’t be able to access as a single investor and avoid some of the liquidity issues of owning a property directly or investing purely in a property fund investment.
The value of an investment can fall as well as rise and is not guaranteed. You may get back less than you put in. Past Performance is not a guide to future performance.
The opinions expressed are those of Standard Life Investments and are subject to change at any time due to changes in market or economic conditions.
The views and conclusions expressed in this communication are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any specific security.