Not all open-ended property funds are PAIFs, although more and more are looking into converting into one.
While commercial property is driven by the economic cycle, its inelasticity and the lag associated with the property cycle means that it does not fluctuate in the same way as other assets. Commercial property also has little relationship with residential property, and the house price boom is of little relevance to commercial property investment.
The fact that commercial property is a tangible asset, still owned even if a tenant defaults, provides a measure of security for investors. On these grounds alone property has a place in a well-balanced investment portfolio. However, exposure should be limited and it is not unreasonable to allocate 15 per cent of capital within an income-focused, diversified balanced asset portfolio.
The range of property investments vary dramatically and the risk profile attached to a particular property investment will depend on a number of factors. If seeking core exposure to the sector for income and for portfolio diversification, the following factors should be considered:
• Exposure to property should be skewed towards direct property as opposed to property shares. Funds investing in property shares are subject to the volatility of the equity market and therefore have a different risk/return profile.
• The investment should have a widely diversified portfolio of properties. This should include a broad spread of sectors (for example, retail, industrial and office) and regional diversification.
• Property is viewed as a low volatility investment and therefore it is not prudent to utilise property funds employing significant gearing (for example, Reits).
• Experienced management. This is a specialist area of investment and the management must be able to demonstrate expertise and a demonstrable track record.
• Property should be viewed as an illiquid part of a portfolio. Although as long as property is a small portion of your portfolio, that should not be a major problem.
After a bumper year in 2014, returns from the UK property market in 2015 look likely to be good again, with many property fund managers predicting a total return for the IPD benchmark being around the double digit mark.
However, most experts and property fund managers believe that next year we will begin to see property reverting to its traditional income-driven behaviour and growth will be driven by rental growth rather uplifts in capital values.
Despite the increasing demand for commercial property the UK is not at the end of the cycle just yet. The ongoing UK economic recovery plus the relatively high levels of income combined with the spread of rental growth across the country, all serve to make property investment an attractive prospect, particularly in comparison with other asset classes.
