Renewed interest from retail and institutional investors sparks a revival in the IMA Property sector's fortunes.
It seems that almost overnight the debate on property investment has gone from when the market will bottom out to whether it's starting to overheat, confounding analysts who until recently were pondering over the sectors slow recovery.
While the sector still has its fair share of problems, renewed interest from both retail and institutional investors has seen a change in the asset class’s fortunes.
While the property sector took a double hit from both falling asset prices and the drying up of the debt financing which had been supporting the property market during the boom, the fire sale by big banks of their distressed assets that many property investors had been hoping for failed to happen.
This left investors all chasing after the few pieces of property that did come to market and has inflated values. In turn, this has helped stabilise the sector and encouraged many big investors to return. Despite getting burnt, it appears investors are now more accepting of liquidity risk; October saw net inflows in to the IMA Property sector of £367,577,466 making it the month’s best selling sector to retail investors and second best selling over all.
Performance of FTSE 100 TR vs IBOXX Stg Corp ALL MATS vs IPD
Source: Financial Express Analytics
Part of this recovery comes from the search for yield. The huge rally in corporate bonds has seen yields fall dramatically and it appears people are now turning to property as a source of income. Gavin Haynes, of IFA firm Whitechurch Securities and AFI panellist, explains why the sector is getting increased attention: "Traditionally income has made up over 70 per cent of total returns from commercial property and the strong capital growth in the five years to 2007 was an anomaly. For the first time since 2007 we have recently started to allocate a small proportion of balanced portfolios to UK commercial property due to the attractive yields available versus other asset classes."
On the surface this may appear to be good news for property investors, but already there are signs that the markets growth is unsustainable, fuelled by loose monetary policy. Graham Toone, also an AFI panellist and Head of Investment Research at AFH Wealth Management, urges caution: "We are now concerned that the huge wave of money going into property will drive up prices too quickly, possibly rendering the market unattractively priced once again. There has already been a considerable yield compression on property as institutional pension funds have moved back into this sector adding to the wall of retail money that is flowing in.
"Inflation is a serious future threat. With its regular upward rent reviews, property has historically been a popular inflation hedge. But if economic growth is weak, or if we have a double dip recession, the risk of voids needs to be carefully considered."
Like equities and bonds, property has seen a rapid recovery as investor confidence has returned, and just like with those asset classes it has prompted scares of a correction.
Even so there are still opportunities for investors; all the time interest rates remain low the interest in property is likely to increase as investors continue to seek higher yields, which hopefully not least good yields which hopefully are based on rental income rather than another capital growth driven bubble.
The sector still suffers from the same liquidity risk that crippled it so badly during the credit crunch and needs to be approached with the same new found caution that all investors should have ingrained in them following the events of the last couple of years.
| Fund | Yield % |
1-yr performance % |
| SJP Property |
4.9 | 10.25 |
| Stan Life Investments Select Property |
3.4 | 9.33 |
| L&G UK Property Trust |
3.7 | 5.83 |
| Ignis UK Property |
5.29 | 3.73 |
| M&G Property Portfolio |
3.5 | -1.42 |
