The Right Moves: Securing a good return while minimising risks of investing in property
With prices for commercial investment property looking strong, no value available on the deposit or bond markets, and Brexit looming over everything, investors might be forgiven for 'taking to the trenches' and waiting to see if any value reappears.
However, there are other ways of finding a decent return in the property sector, without taking too much risk.
Chris Hills, chief investment officer with Investec Wealth and Investment UK, has 38 years experience in managing private wealth and plays a central role in Investec Wealth and Investment's Global Investment Strategy Group. He told me that there are new options for investing in commercial property in the UK and Ireland and several with state-supported income streams.
One such sector is that of doctors' surgeries and there is a trend, both here and in the UK, for surgeries to get bigger and incorporate pharmacies and physiotherapy clinics.
In the UK, the National Health Service (NHS) underwrites the rent for surgeries in the state sector and there are three funds on the London Stock Exchange (LSE) that hold and lease these facilities.
The largest of these is Primary Health Properties Plc (PHP), which owns 290 surgeries in the UK, on 15- to 20-year leases with no break clauses and upward-only rent reviews (abolished here for new leases), yielding approximately 5pc. PHP recently bought its first such investment in Ireland, a surgery in Tipperary on a long lease, for approximately €6.7m, suggesting a yield of 5.2pc.
The centre is fully let and rent-producing. Three quarters of the rent roll is contracted to the HSE for a 25-year lease term, while the remainder of the rent roll comes from 25-year leases to a group of GPs and a pharmacy operator.
Purpose-built student accommodation is all the rage in the UK, said Hills, and 20pc of accommodation is provided by the private sector. Two listed funds and several private companies are specialising in developing and operating these properties.
The largest listed company is GCP, with a market value of £500m, and yields to investors are approximately 5pc.
Care homes is another growing area in the UK but Hills tends to shy away from facilities owned by private limited partnerships.
A preferred option is listed specialist Target Healthcare, which has a market capitalisation of £300m and operates 40 facilities, focused on caring for residents with dementia.
The company leases the facilities to operators on 25-year leases with inflation-linked rents and produce a net yield to investors, after management costs, of approximately 5.5pc.
Housing associations in the UK are a likely new alternative, says Hills and there are over 1,500 housing associations there, holding over four million properties. Their operating costs are high and a lack of capital is preventing them building badly-needed new houses.
Hills expects to see one or more sale and leaseback deals happening this winter. The first is likely to be a package of 3,000 to 4,000 houses, leased back by a housing association on a 25-year lease. The lot size will be in the order of £300m and yields will be 4.5pc to 4.75pc.
Private Finance Initiatives (PFIs) are increasingly popular worldwide, whereby the private sector invests in developing public buildings such as hospitals and schools. Hills said that despite the fact that the state can borrow at an interest rate of 2pc, private companies are earning returns of 8pc by building, and often maintaining, such buildings.
There are several funds listed on the LSE, the biggest of which is HICL Infrastructure, with a valuation of £2.5bn and stakes in 100 projects.
Commercially-renewable energy is another new sector suggested by Chris Hills, and again there are returns of 5pc-plus from funding, for example, wind farms, where half of the income is from selling power to the national grid.
Hills sees Ireland as a likely beneficiary of Brexit, although he sees the shortage of housing as a big problem for firms relocating.
For myself, I can't see a developer in Ireland, in a rising market, taking an option fee to hold space and I suspect that companies are going to have to commit to leases and incorporate an ability to sub-let as their safety net, if plans change.
Of course, the 'vultures' among you may already have utilised the sterling collapse and pounced on funds such as Aberdeen (values marked down 17pc post-Brexit, but now back to a 6pc reduction).
It's all risk. Always take advice.