Commercial real estate has long been a popular option for investors looking for an alternative to stocks and corporate bonds. Offices, malls, warehouses and factories can provide good regular income through rental yields. It should never be more than a small part of a portfolio, but investing money in bricks and mortar can be a valuable way to diversify your investments.
However, the commercial real estate companies investing in these buildings are currently going through a torrid period. Offices and malls that looked like a good bet in the pre-Covid world have lost value as many people still work from home and shop online.
Delivery warehouses have risen in value thanks to the growth of online shopping. But stocks have fallen as investors fear consumers will rein in spending as the cost of living crisis takes hold. Market jitters increased earlier this month when Amazon announced it had acquired too much warehouse space too quickly.
Looking ahead: Fund managers and analysts are divided on the best bets in the current climate
But as values fall, some experts believe good buying opportunities are emerging.
Max Nimmo, real estate analyst at broker Numis, calls the current situation “a unique scenario, where high-quality assets can be purchased at huge discounts, if you find the right portfolios”.
“The baby was thrown out with the bathwater,” he says of the collapse in property company valuations.
Investors looking for a commercial real estate fund or company will need to exercise caution as their composition varies widely. They can include investments in industrial estates, giant warehouses, shopping districts, offices or even hospitals and GP surgeries. Some invest in a single region, while others focus on a specific type of property.
Fund managers and analysts are divided on the best bets in the current climate.
Calum Bruce, manager of the Ediston Property Investment Company (EPIC), is free to invest in many types of commercial properties within his fund, but has recently shifted money to commercial parks outside the city , where it sees the most value. .
“While all retail sectors have been hit hard by the lockdown, retail parks have come through it in much better condition than the traditional high street,” he says.
“Now the outlook for the sector is getting brighter and brighter. Retail parks are convenient for the customer, but they are also better for retailers because they offer more adaptable space at considerably lower rents.
Nimmo believes there is value in office buildings, but only in those of the highest quality. “Companies recognize that they need to be in the best quality space if they want people to come back to the office,” he says.
“It has to be a place where people want to go.”
Darius McDermott, managing director of Chelsea Financial Services, is more nervous about shopping malls and offices and prefers nursing homes, supermarkets and warehouses as long-term bets. To spy on the best opportunities, commercial real estate investors will have to make their own decision about how they think these long-term social trends will play out in the years to come. Some of the most popular real estate investment companies are currently negotiating huge discounts. This means that you can buy shares at a price lower than the value of their underlying holdings.
Oliver Brown of investment firm RC Brown Investment Management mentions the Tritax Big Box fund, which is the UK’s largest investor in logistics warehouses.
“It is currently at a 9% discount and its dividend yield is attractive and growing,” he said. The company’s stock price is up nearly 50% over three years, even after falling nearly 18% this month. Nimmo likes Segro, another giant fund that invests in warehouses. “It is currently trading at a 3% discount and performing well,” he explains.
McDermott suggests that if you don’t want to pick a particular investment company, you can buy shares in a fund that invests in more than one. BMO European Real Estate Securities or Cohen & Steers Global Real Estate Securities are two options that invest in a range of different commercial real estate assets. They returned nine and 18 percent over three years, respectively.
Another way to invest in commercial real estate is to use funds that are not publicly traded. However, these can peel off if many investors try to withdraw their money at the same time. The property is difficult to sell in the short term, so the funds can “block” or prevent investors from withdrawing their money if necessary.
Many real estate funds have been frozen during the pandemic. Janus Henderson’s real estate investment fund did the same recently and has now announced that it is liquidating the fund, returning money to investors once it has sold the properties it contained.
In contrast, real estate investment trusts, such as Tritax Big Box and Segro, do not have this problem. You buy shares of the investment trust, which in turn buys and sells trading assets. This means that if investors abandon their shares immediately, it hurts the stock price but does not force the fund manager to sell properties in a hurry. However, if you are investing in commercial real estate, there may be lucrative opportunities, but you should be prepared for a few tough years. No one knows for sure how our buying, working and healthcare habits will play out in the long term – and in the meantime, commercial real estate faces a bumpy ride.
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