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Investing - the case for Commercial Property

In an earlier blog The need to diversify  I wrote about my investing philosophy and my strong feeling that you need to spread (or ‘diversify’) your money across the various asset classes- Cash (savings accounts), Equities (the stock market), Corporate Bonds (Company IOU’s), Gilts (Government Bonds), Commodities (Gold) and Infrastructure (PFI projects such as road building, hospitals, Defence facilities etc).

The other main asset class that I think is very important to have money in is Commercial Property. Why?

Well, to begin with, it is important to understand what this asset class actually is. Another of my investment mantras is “Don’t invest in anything that you don’t understand’! It is investing in funds (usually a Unit or Investment Trust) that themselves invest in offices, retail parks and shopping centres with the aim of generating all-important income from the tenants (the fund company are in effect their Landlords, although they usually use managing agents for that role) as well as some capital gain from the value of the property.

This income and capital appreciation is then returned to its investors based on the proportion of their investment in it. Now commercial property has traditionally been important to investors ‘ portfolios as their value tends not to be driven by the vagaries of the stock market, but more of the general wider state of the business economy (if the economy is booming more companies will want to expand and rent offices or open a retail unit for example), and how you value a set of offices is not the same as how the market values companies. As an illustration, if you look over the last 12 months, the FTSE All Share Index which represents the wider UK Stock Market has suffered a loss of 6.9%, however those funds that invest directly in property, rather than through property shares (a different beast entirely) have done much better with returns over the same period of around 3%.

For me, the real attractions of commercial property is that you are now getting a very healthy yield (income) that compares very favourably with what you can get in savings accounts and also equity stocks. A personal favourite fund of mine is the Foreign & Commercial Property Trust or more commonly known as simply FCPT

It is an investment trust which means that it is an investment company traded on the stock market so you can invest in it either via a stockbroker service or direct through a very cost effective savings plan.. ‘Foreign & Colonial’ are a very well known fund management company having started the first ever Investment Trust way back in 1868. The fund itself is managed by Richard Kirby and at present has around £960m invested- quite a considerable amount.

Its performance over recent periods is very impressive – having returned 65.7% over the last three years (although like other property funds it has been more turbulent over longer periods) and the current yield it pays is a very attractive 5.9%. One of its other attractions is that it is one of the few property funds that pays out a monthly income which can be very attractive if you are reliant on that kind of income, to perhaps supplement a pension or salary.

It currently has around 40% of its money invested in Offices, around 27% in Retail (shops etc) and nearly 20% in warehouses. Around 70% of its properties are in London or the South East in places like the Newbury Retail Park and Wimbledon Broadway etc.

Funds such as FCPT are to my mind very attractive- they offer a high level of income, they are generally less volatile then conventional equity funds, but still offer some potential for growth. That’s not to say that they would not suffer in any euro zone meltdown of course but on the risk scale they do have some protection and certainly as part of a sensible, well balanced portfolio it could be a good fit.

Investing your Money? Diversify!

I have a fairly long history of running my own investment portfolio going back to the late 1980’s, and the country like now, was in recession territory, but what it does teach you is that if you can invest successfully in those conditions then you should be OK in much calmer water.

One of the main things that I have learnt from investing my money is that there really is not any replacement for having an investment portfolio that is widely diversified in assets. Now frankly, that is a bit of a mouthful but what I mean to say is that the chances of your money doing well is largely reliant on the type of assets you invest in, rather than a specific company share, bond or even savings account. Figures indicate that around 90% of your investment return is dictated to by the kind of things you put your money in.

Example: say you think that the world is going to hell in a handcart (not an unreasonable view at the moment) and that you don’t trust anyone to invest your money wisely and want it somewhere relatively ‘safe’. So, you put it all in cash savings accounts and keep it there for say 5 years. If the last 5 years are anything to go by putting a lump sum of say £10,000 in cash would return (with your capital) a total of £11,885 or an average interest rate of 3.77% per annum. Now that takes no account of inflation, which over the same period amounted to 17%, so your money would have only just about beaten inflation.

But what if you were more adventurous and put your money somewhere a bit more racy?

What about the stock market for instance? If you elected to put your £10,000 in a FTSE 100 Tracker (that replicates how the top 100 UK companies perform), that £10,000 would now be worth £10,100- a return of just 1%- substantially less than putting your money in cash, although the last 5 years have been a very torrid time for stock markets in general.

So, what about Bonds? These ‘Corporate Bonds’ are basically IOUs that companies issue to its investors and you can get your capital back at the end of the term together with a fixed income amount which can be paid monthly, quarterly or yearly. Well, a 10k investment in the average Corporate Bond fund would have returned a very handsome £12,110 – or a 21.1% return of the half-decade, easily beating shares and also cash.

How about Government Bonds (or ‘Gilts’ as they are properly known)? Well, £10,000 would have returned an even more impressive £14,280 or a total return of 42.8% or around 8.5% each year.

And what about the much talked about asset of Gold? Well, that really beats the lot as your £10,000 invested in 2007 would now be worth a whopping £23,160 or around 26% each year. Let’s look at those figures together:

  • Gold     + 131.6%
  • Gilts     + 42.8%
  • Bonds  + 21.1%
  • Cash    + 18.85%
  • Shares  +1%

The range of returns is actually quite huge from a measly 1% for shares to a massive 130%+ for gold and of course, this just looks at the last five years, the next five years, indeed the next 5 days, may not perform in anything like the same way. The stock market may recover which would likely lead to diminished returns for the ‘flight to quality’ and so-called more ‘secure’ investments such as Gilts, Bonds and Cash.

What I have learnt though is that in the world of investing the adage of ‘no one knows anything’ is a sound maxim and that in order to reduce the risk of you losing money to the latest trend or fad but also to increase the chance of making money, it is prudent to invest in a range of asset classes- so for example if you had invested your £10,000 across the five investment areas above (£2,000 in each) you would have got back after the five years a total of £11,885 – a return of 18.85% - identical, incidentally, to that of cash, but it would have reduced your risk that by putting all your money in any one asset class that your money would have been in jeopardy if there was a ‘crash’ during that period or even if interest rates were slashed at various points.

I think that asset allocation and good diversification of your money is key to protecting and growing your nest egg, so that you spread your risk/returns- but, as ever, whenever you talk about money, do get independent financial advice. I did and it has paid off. So far.