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Geopolitical tensions and the ongoing recovery from the global pandemic continue to create significant uncertainty for investors.

Policymakers are attempting to tackle the corrosive impact of inflation rates paired with the expectation that the Bank of England is set to increase interest rates to a 27-year high1.

In such challenging times, it is understandable that investors seek a flight to safety, abandoning volatile assets such as equities in favour of real assets.

Real assets such as property have also proven to be a reliable hedge against inflation, with many sectors historically outperforming inflation over the long-term. Some sectors like commercial long income have leases that commonly include inflation-linked rent increases.

Yet despite the potential long-term benefits of including commercial property in a diversified portfolio of assets, misconceptions may deter some investors from allocating to real estate.

We explore some of these common misconceptions and explain how commercial real estate investment can be a valuable addition to a portfolio for today’s long-term investors.

 

  1. Investing in commercial property is unpredictable post-COVID-19

The global pandemic created uncertainties for the future of commercial real estate. As companies were forced to move to home working, there were predictions that this model would become permanent. However, hybrid working appears to be the favoured approach as the world emerges from lockdown, and commercial property is still very much in demand. In the UK, the Q1 2022 RICS Commercial Property Market Survey shows a 30% increase in demand for office space compared to the end of 20212.

There have been commercial real estate winners borne out of the pandemic. Real estate sectors, such as logistics, have benefitted from structural changes within the retail market, picking up the lost revenue from the high street.

Sectors that are less cyclical, where demand is less influenced by the economy, have also seen continued performance. These include healthcare and social housing, which all continued to operate throughout the pandemic, as the services and care provided at these properties are essential. Such sectors are indicating long-term trends, highlighting increased demand in the future and are also heavily undersupplied in terms of quality real estate available.

While some uncertainty will continue within some commercial real estate sectors, as the world adapts to a new normal post-pandemic, the negative forecasts for the sector as a whole appear overblown.

  1. Rising interest rates make investing in property less profitable

Low interest rates, as a result of tight economic policy following the global financial crisis, helped prop up real estate. However, it does not follow that as interest rates start to rise, the commercial property markets will be negatively affected.

Property yields and interest rates have a relatively low correlation, as seen after the financial crash of 2008 when interest rates fell, property yields did not follow the same path2.

  1. Investing in property ties my money up for the long-term

Property investments can be illiquid.

At certain points in the economic cycle, the ease with which you can buy or sell property will vary. Market shocks and other events can mean it costs more to withdraw from property investments, as we saw during the financial crisis and post-Brexit.

However, liquidity varies across the assets within real estate and the markets in which they are based. By investing in a diversified portfolio of real estate assets through a fund, it can be easier to access listed real estate securities, as well as investing in direct property.

  1. Commercial property investment requires a lot of capital

Deposits and mortgages for commercial properties are higher than those for residential. Investors looking to make direct investment may need substantial capital. However, investing through a commercial property fund could mean making a minimum commitment of well under £5,000.

  1. Commercial property is not compatible with an ESG investment strategy

The UK’s built environment is responsible for 25% of the country’s carbon emissions3, which might suggest that the sector is not suitable for investors trying to manage climate change risk.

However, in the last two decades, emissions have reduced by 30% as the efficiency of current building stock improves and are replaced by greener alternatives, and policymakers are placing a huge expectation for buildings to be net-zero by 2050.

Properties boasting verifiable green credentials offer attractive investment opportunities in not just the commercial real estate sector, but also residential.

At the same time, investing in commercial properties with a social purpose – affordable housing, schools and hospitals for example – can also meet investors’ ESG targets while delivering long-term value.

Far from being mutually exclusive, commercial real estate investment offers a genuine opportunity for investors to make a long-term return, alongside making a real difference to  society.

 

Wealth Briefing

FT Adviser

 

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[1] https://uk.finance.yahoo.com/news/bank ‑england‑set ‑biggest‑interest‑050000578.html

[2] BNP_Paribas_REIM-Property-yields-and-interest-rates.pdf (bnpparibas.com)

[3] https://www.ukgbc.org/climate-change-2/

 

Key risks of the fund include:

 

  • Investment risk – The value of shares in the fund can go down as well as up and is not guaranteed. Investors may not get back the full amount invested.
  • Liquidity – The underlying assets are illiquid assets when compared with other asset classes such as listed equities or bonds. This fund is intended for investors who can accept the risks associated with making potentially illiquid investments in direct property. Therefore, at times it may be difficult to make investments/sell assets to meet investors’ requests to buy/sell shares in the fund over short time periods.
  • For more information on the risks of the fund, please see the fund’s prospectus or KIIDs.

 

Important information: This is a financial promotion as set out in the Financial Services and Markets Act 2000 (FSMA). This document is issued in the UK by TIME Investments, a trading name of Alpha Real Property Investments Advisers LLP, which is the Investment Manager of Commercial Long Income PAIF (TIME:Commercial Long Income or the fund) with delegated authority from Alpha Real Capital LLP, the authorised corporate director of ARC TIME:Funds II. Commercial Long Income PAIF is a sub-fund of ARC TIME:Funds II. Both TIME Investments and Alpha Real Capital LLP are authorised and regulated by the Financial Conduct Authority. Please note there is no guarantee that the fund’s investment objective will be achieved. The value of investments and the income from them may fall as well as rise as a result of fluctuations in market, currency or other factors and investors may not get back the original amount invested. Any past performance data cited is not a reliable indicator of future results. TIME Investments may source data from third party data providers but accepts no responsibility or liability for the accuracy of data. This document does not constitute investment advice and potential investors are recommended to seek professional advice before investing. Applications for shares in the fund can only be made via an Application Form and reviewing the Key Investor Information Document and the Prospectus and investors should carefully read the risk warnings contained within. All documentation is available on request. Specific Fund Information: The underlying investments in the fund consist wholly or substantially of real property. The value of the real property concerned will generally be a matter of valuer’s opinion rather than fact. The fund invests in assets that may at times be hard to sell. This means that there may be occasions when you experience a delay or receive less than you might otherwise expect when selling your investment. For more information on risks, see the fund’s prospectus and KIID. Fund Status: The fund is a Non-UCITS Retail Scheme within the meaning of the rules contained in the Collective Investment Schemes Sourcebook (the FCA Regulations) published by the FCA as part of their Handbook of rules made under the Financial Services and Markets Act 2000 (the Act). All information correct as at May 2022.

 

Wealth Briefing

Posted: 11/05/2022 Categories: News

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