Commercial property may again come to the fore, says Ignis

Commercial property may again come to the fore if inflationary pressures emerge in the wider economy, says George Shaw, manager of the Ignis UK Property Fund.

Opinion has been divided on whether the worst threat to the economy is inflation - caused by significant expansion of the monetary base - or deflation - caused by the fall in demand. But with the Monetary Policy Committee opting to stimulate the UK economy through quantitative easing, investors should be anticipating inflation sooner or later.

"It is generally acknowledged that quantitative easing is likely to trigger inflation over the medium term," says Shaw. "Tangible assets will, therefore, be particularly important going forward and income will be the key component of returns as investors seek to hedge against this risk. Portfolios with a high, stable and secure income stream are likely to outperform over the next two to three years, which is a benefit commercial property as an asset class can offer."

Prime yields stabilising

The property market has continued to fall over the past 12 months, with secondary properties in a number of sectors now providing double-digit income yields. While yields have also fallen among prime properties, the rate of decline in capital values has slowed markedly and there are signs that a bottom is being reached for select stocks. The Standard Life Office complex on Lothian Road in Edinburgh, for example, attracted several bids and is reported to have exchanged at £55m; a net initial yield of 6.5%. "There are signs of interest for better quality stocks and yields for certain tiers of prime stock appear to be stabilising," says Shaw. "That said, further rises in all property yields remain likely in the short term."

Maximising income is key

Enhancing and protecting income is always a fundamental part of property investment but recent conditions have made proactive asset management even more important. "Security and length of income stream are vital during challenging market conditions," explains Shaw. "We have been working with tenants and external consultants to secure lease renewals; achieve successful rent reviews and minimise vacancies. Careful scrutiny of the financial strength of our tenants has ensured a low level of vacancy in the Ignis UK Property Fund." A benefit of property investment is that the rental income stream can also be actively managed. "Rent reviews in our leases are upwards only so once the rent has been struck the income is relatively secure and has the opportunity to rise," explains Shaw.

Top quartile performance

The Ignis UK Property Fund is placed in the top quartile since launch. "Proactive asset management has been key to our performance in the past year, in what were challenging conditions for the overall property market," says Shaw. "We have not made any capital transactions over the past six months so we have retained our core assets and managed the income from them."

A general improvement in both the economic backdrop and liquidity conditions are necessary precursors to a more buoyant investment market. "There are good opportunities in the property market with yields looking historically attractive," says Shaw. "Given good medium-term prospects, and having built a prudent cash reserve, we are keeping our eyes open for opportune purchases and sales, with positive returns possible from 2010 onwards. In the short term, however, our primary focus remains on the income stream for our investors."