Using Foresight In Commercial Property Investment

By Author: Peter McGahan
Total Articles: 1
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Hindsight and foresight - How useful can that be particularly in light of the ongoing commercial property fiasco.

Most of the readers of this column over the last ten years may have noticed how we walk when others are running, and the calamity that is the overselling of commercial property funds and REITS (real estate investment trusts) is another classic example.

For the last eighteen months I have noticed countless advisers telling customers to move from with profits to property funds. My response to readers who have written in, is to mention frying pans and fires and I have warned of the impending plummet on five occasions over the last three years period.

It is generally believed that most use hindsight to invest rather than foresight. Most journalism is in the past or present which has no function in planning. It is precisely why we can all be guilty of talking up markets and talking them down rather than observing where they are truly going. Seek advice from an independent financial adviser before taking any action.
I believe all that matters is where you are going, not where you are coming ...
... from, and for two years have been advising readers to be cautious about commercial property. Those of you who took that guidance may have missed the sharp re-rating of commercial property over the last six months, and those who invested may wish to consider the remainder of this column.

There has been a sharp sell-off of commercial property and fund managers have taken the opportunity to curb this by effectively re-pricing their investments funds to a bid price (more eloquently put as a very stiff exit penalty).

It was most surprising to see the response in many of the trade advice press where advisers were asking for greater clarity on how these funds work in terms of their ability to do this. (So what they are really saying is that they didn't know what they sold their client).

So why have many missed it? The signals were there for ages: The yield (income) from commercial property was and still is less than cash, so why would you take the risk? The current yield for property is also around 4.7% compared to short term borrowing rates of near 6%. (1) Why on earth is that a bargain for an investor?
Sure, I hear the wannabe financial adviser saying that commercial property might have a low yield but there is also the chance of the property price increasing! What? If that happened the yield will drop further - so that doesn't make sense.

I advised that when the yield dropped below 6% that the investor should have sold. Instead I have watched advert after advert extolling the virtues of this asset class as part of a portfolio of investment funds.

It has taken some time for the penny to drop with the market, that the monetary policy committee's stance (assault) on interest rates and the residential property owner is cause for concern. This has made its way through to a near 20% drop in the price of major UK property equities and REITS (another potential fiasco I advised against) (2).

So what are the options for you if you have a commercial property fund? Consider reducing your exposure, but be careful of any tax consequences. If you are invested via a pension there will be no tax disadvantage. If you are invested via a collective such as a unit trust or Oeic consider that any gain should be less than your capital gains allowance and seek the advice of a chartered accountant if it is. If it is inside a bond the issues are considerable and seek advice from an IFA.

(1) Morley fund managers
(2) Williams de Broe

For advice on any commercial property fund call email or if you have a financial query, call and speak to one of our Independent Financial Advisers on 0845 230 9876 or e-mail info@wwfp.net

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Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.

Peter McGahan is the Managing Director of Worldwide Financial Planning Ltd. Worldwide Financial Planning are authorised and regulated by the Financial Services Authority.