Getting a real deal

‘‘Ninety per cent of all millionaires become so through owning real estate” – Andrew Carnegie, steel magnate and philanthropist and one of the richest men in history (1919).

Coming from a man who made Croesus look cheap, these words suggest that an investment in commercial property should be a key part of any portfolio. But since few of us can afford to snap up a skyscraper, factory or shopping mall, how should we tap into the market? Is now the time to do it?

Currently, prime property investments yield around 5 per cent compared with the 2.9 per cent on UK government bonds. With a total return of 8.1 per cent in 2011, property also comfortably beat equities, where investors lost money over the year. All of which suggests that there is still value in the commercial property market.

Ongoing economic uncertainty in the UK will inevitably affect the underlying demand for all types of property, unless you’re flogging a Kensington mansion to an oligarch.

But a significant amount of the return on commercial property investments comes from rental income – and as long as this stays fairly stable, the sector should continue to provide relatively attractive real returns until capital growth comes back.

The main routes for private investors to access the commercial property market are through investment in funds, investment trusts or real estate investment trusts (REITs).

Mutual funds can be bought and sold on a daily basis with moderate costs, and are offered by most large investment houses and insurance companies.

Property investment trusts have shown better returns over the past three years. They have the extra plus point that they can borrow to take advantage of opportunities, can hold money in reserve to ensure continuity of dividends in poorer times and, as companies quoted on a stock exchange, can be quickly bought and sold.

Economic uncertainty in the UK will inevitably affect the demand for all types of property”

REITs are publicly-listed companies which are not subject to corporation tax or capital gains tax on their qualifying activities – and as a condition of this tax status, 90 per cent of their income from these activities has to be distributed to shareholders as dividends.

Most of the large quoted property companies in the UK, such as British Land and Segro, have converted to REIT status. These stocks are highly liquid and offer 4 per cent to 6 per cent yields, but do tend to move more in line with the stock market so give limited protection against ups and downs.

Changes to the rules governing REITs set to be introduced under the Finance Bill 2012 should make it easier to establish them – making REITs more attractive to institutional investors such as pension funds and insurance companies. The changes will also extend their scope into other sectors such as residential.

In the end, the bleak economic picture means we shouldn’t wholeheartedly concur with Carnegie. Instead, we may align ourselves more with Will Rogers, America’s cowboy philosopher, and his advice: “Don’t wait to buy real estate, buy real estate and wait.”

Tom McIntosh may have an interest in any investment topic he writes about

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