This article is part of Morningstar’s Guide to Income Investing. Whether you are looking grow your pension pot, or invest for retirement income, this week we have all the news, information and education you need.
UK commercial property remains supported by strong underlying industry fundamentals but with valuations in certain prime sectors becoming of increasing concern. Even so, close to double-digit IPD index returns appear probable over the next twelve months. Unfortunately, most directly invested property funds will deliver less and fund flows need to be watched closely as the pricing basis can change alongside investor sentiment.
Whenever equities stumble, UK commercial property tends to perform well
From an asset allocation perspective, the latest equity correction has not altered the preference for equities over bonds. Bonds remain relatively poor value and, from a global perspective, dividend yields are currently higher and equities have the added prospect of reasonable capital returns given recent valuation improvement. Commodities remain high risk, although most have fallen significantly, while the ongoing UK commercial property cycle should produce UK direct property fund returns well in excess of cash for at least another twelve months.
Following a strong end to Q2, IPD All Property returns unsurprisingly eased in July although capital value growth was the highest for the first month of a new quarter this year. Growth in both capital and rental values remained very healthy and indeed, three month annualised returns from UK commercial property were well above those for the year to date.
This was particularly true of offices and industrials which recorded annualised total returns of nearly 20% in the three months to July. Still relatively strong economic performance and business sentiment, together with a shortage of available space, continue to support occupier markets and rental growth across all regions.
Threat of Rising Interest Rates?
Rising interest rates are often cited as a major concern but history has shown that direct real estate is not particularly sensitive to movements in either short or long term rates, being more responsive to economic developments. Indeed, if the past three month’s figures are any guide, there could well be upward revisions to return forecasts for both this year and next to 14% and 9% respectively.
Directly invested property funds are likely to produce returns some 3-4% less than the IPD index and it should be noted that some fund groups swiftly move to cancellation pricing whenever investor inflows shift to outflows.
Whenever equities stumble, UK commercial property tends to perform well and the overweight position once again added to asset allocation returns. Year to date, IPD index returns are approximately 10% ahead of cash, bonds and equities and 23% above commodities.
