Time right to invest in commercial property

Posted On Wednesday, 04 March 2009 02:00 Published by eProp Commercial Property News
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People should take advantage of investing in commercial property during the downward trend in the interest rate cycle before the lagged effects take over, says Craig Hallowes, spokesman for the Association of Property Unit Trusts.

Craig Hallowes“Don’t wait until the full effects of the current interest rate cutting cycle has worked its way through the economy before investing in commercial property, he says.

While consumers have already seen a 150-basis-point cut, some financial institutions expect a drop of another 200 to 300 points before the end of the year. Hallowes says much of this anticipated decrease in interest rates is already priced into the market.

He says the bond and forward rate agreement market tend to be more efficient than the property market when it comes to pricing because property has a growth and expectation value to it, which is a little less easy to price. However, all the markets are predicting a significant drop in interest rates.

Investors should be using the so called “saving” in interest payments to invest in equities or income-generating commercial property instruments, such as property unit trusts, he says.

“That’s if consumers have got their debt levels under control and can afford to invest,” says Hallowes. “This is a good time to be looking to enter the commercial property space, and property unit trusts do offer that diversified portfolio spread that investors should be aiming for.”

However, he says that it is important that each investor carefully consider their appetite for risk and assess their level of gearing or debt before investing.

In today’s bearish market, property, due to its yield, tends to trade more like a bond.

“In theory, a decrease in interest rates means that the values of property counters should go up as their yields are compressed,” Hallowes says.

As gearing is one of the biggest costs, any decrease in interest rates means that the operating costs decrease at a property unit trust fund level, making the fund more “profitable”.

“On a more general level, any decrease in interest rates positively affects the customer base, and this is especially true in the retail sector.

“This could lead to increased spending and a better-off financial position for tenants.”

For those investors already exposed to commercial property, the market is ripe for investors looking to increase exposure. “While the consensus view is that consumers are under pressure, the cycle will turn and commercial property will continue delivering attractive returns. Investors with a medium- to long-term view of their portfolios should allocate a portion of their investments to property.”

Hallowes says it is always difficult to call the “bottom” of the market, and this is something that investors should try to avoid.

Investors are advised to take a longer view on property as an asset class, and base their investment view on where they see value in the counters that make up the sector.

“An initial entry via a property unit trust structure is a good starting point,” he says.

Last modified on Wednesday, 23 April 2014 19:01

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