Source: The Telegraph
Investment returns from commercial property have soared in the past two years. But are the investors who are now pouring cash into the sector coming to the party too late?
Over the past 12 months almost £4bn has flowed into funds that invest in commercial property. This amount exceeds the previous peak set in 2006, at the height of the property bubble.
And in 2014 commercial property made gains of 19pc, the highest annual return since 1988, according to the Investment Property Databank (IPD).
Will the next 12 months also produce big returns? Many experts are optimistic, with some tipping total returns of 10pc or more, although they don’t expect a repeat of last year’s stellar performance.
Here we explain why commercial property could continue to shine, while weighing up the arguments against putting too much of your Isa into property funds.
Why are experts predicting double-digit returns again this year?
One of the main reasons for the boom in commercial property over the past couple of years is that Britain’s economy has been growing.
When the economy is doing well, there are more tenants seeking space for their shops, office and warehouses, so property owners feel more comfortable about charging them more rent. This then boosts capital values.
Mike Deverell of Equilibrium, the wealth manager, said: “There is historically a strong correlation between economic growth and commercial property values. When the economy is in recession prices tend to fall, but when it is growing prices tend to rise.”
One reason for analysts’ confidence that commercial property will continue to perform well this year is that, for the past four quarters, growth in commercial property values has outstripped growth in rental incomes.
This has not happened since March 2007. The financial crisis significantly reduced the value of buildings, and these capital values have only now started to recover.
Aviva, the insurance giant that pours billions of pounds of its customers’ money into commercial property, expects this trend to continue in 2015. The company has predicted total returns – rental income plus capital growth – of 18pc.
Richard Levis, a commercial property analyst at Aviva, said the fact that a rise in interest rates looks at least a year away should boost capital values further.
“Record low interest rates provide further support to the relative pricing of real estate and will aid the recovery in property markets,” he said.
Duncan Owen, head of real estate at Schroders, the fund manager, agreed. He also predicted that 2015 would be another year of double-digit returns. “The recovery in the economy, combined with low levels of development, means that the balance between demand and supply is now swinging in favour of landlords and we anticipate that rental growth will accelerate,” Mr Owen said.