Standard Life, the most aggressive investor in UK property in the past two years, has warned of risks for the sector.
Commercial property would deliver stronger returns than bonds and cash in the next few years but was likely to lag behind the UK stock market, the life assurer said yesterday.
There were several issues facing the sector after years of galloping growth, warned Andrew Jackson, an investment director at the company that has £9.5-billion of property under management. These issues included the recent downward pressure on yields, which have dropped to record lows after a surge of investment into the sector.
Initial yield is now less than 6% for the first time since 1988, according to Investment Property Databank.
Other concerns include the possible introduction of a government ban on upward-only rent reviews, which protect investors' returns. Also, there was "low probability" that there would be a further 14 years of unbroken economic growth, said Jackson.
Standard Life's attempt to dampen expectations on Tuesday followed last month's warning by the Bank of England that some banks might have underestimated the risks of increasing their lending to commercial property investors.
Enthusiasm for commercial property, which forced prices to highs last year, has also spilled into property shares. But analysts at Merrill Lynch yesterday suggested a downward correction of between 5% and 10% for the sector may be due.
The investment bank said property had good medium-term prospects but share prices had overshot themselves. Standard Life's warning comes after a dazzling performance by commercial property last year, delivering total returns of 18% for the 12 months to November.
The Scottish life assurer last year spent £1.25-billion on commercial property, beating its own forecast of £1-billion. Over 18 months it has invested an estimated £2-billion, making it the most enthusiastic of all the institutions.
Jackson insisted that commercial property was not overpriced. Standard Life was still encouraging many of its pension fund clients to increase their exposure to the sector to between 10% and 20%, "or even 25%," he said.
However, investors did need to be more cautious. "It is just a case of 'let's be a bit more grown-up', it can't all be one way and there are risks," he said. "We do not expect a fall in commercial values, they are still relatively attractive, but there has to be more uncertainty going forward," said Jackson.
The biggest danger was in secondary or tertiary property - for instance, high streets in market towns - where the price gap with primary property had narrowed, he said.
Financial Times
Publisher: Financial Times
Source: Financial Times
