Q. In my investment portfolio I have 10% of my money invested in 2 commercial property funds. As I am due to review the portfolio, do you think I should continue to hold these funds? My objective is capital growth for the next 10 years or so.
A. On 29 February IPD (Investment Property Databank) published its annual numbers for 2011. These statistics differ from the monthly IPD figures in that they are based on a larger number of properties (11,657 valued at £145.4bn) – hence the delay in publication.
Total Return Capital Growth Income return
% % %
All property 7.8 1.9 5.8
Retail 7.1 1.3 5.8
Office 9.0 3.1 5.7
Industrial 7.3 0.4 6.9
The lack of capital growth is no surprise: the monthly IPD numbers have recently turned negative after flat-lining for much of 2011. The 3.1% growth performance for offices was driven by a 7.7% rise in City office values, pushing up the overall average.
What stands out is that three quarters of the total return is down to income. The 5.8% income return is in stark contrast with the 1.52%* currently on offer from 10 year gilts. The margin is at an historically wide level and explains why some income-seeking investors are paying more attention to property assets.
As usual, IPD’s press release has a comparison with annualised returns from UK equities, gilts and inflation, putting the performance of property in context:
1 Year 3 Years 5 Years 10 Years
% % % %
Property 7.8 8.7 (0.7) 6.9
UK Equities (3.5) 12.9 1.2 4.8
Gilts 15.9 7.9 9.0 7.0
Inflation (RPI) 4.8 4.0 3.4 3.3
The negative 5 year figure for property reflects the fact that at the end of 2006 the market was just 6 months away from a 42% fall in capital values, of which less than a third has since been recovered.
The conclusion is that these IPD results suggest that property could be returning to its traditional role as primarily an income investment, so you may wish to continue with it as a key component of your portfolio.
*Source: ft.com 12 July 2012