Commercial Property Shares

Landlords of both residential and commercial property have been hit by a raft of bad news following the recent 'credit crunch'. Suddenly, after a decade long love afair with everything 'brick & mortars' investors have fallen out of love with this asset class.

Fall in commercial property
The fall in commercial property values has been particularly sharp as tightening credit conditions and a sudden loss of confidence has caused many investors and institutions to reappraise the market and resond by cutting their property holdings. Some property companies have been caught out having over paid during the 'boom' in commercial property values in the last couple of years. This boom ironically was fueled by investor demand and investment advisers readily 'pushed' property investments funds on the back of unrepeatable impressive past performance figures.

Property Leper funds
Now the same advisers with these funds and investment companies standing at often less than half their values at the peek of the boom are often cautioning their clients about going anywhere near these same investments. This to me as an investor seems strange, particularly when the fundementals of these investments are examined. At their peak many property investment funds were selling at a premium to the value of their underlying asset values and perhaps yielding a gross dividend yield (but unlike direct property ownership such as buy-to-let, net of management costs) of 4-5%. Now these same funds and companies are trading at significant discounts to their underlying asset values of 30-40% and have near or double digit yields.

Why the fall?
Property values have been falling there is no doubt about that. Commercial property is down about 20% since the 'credit crunch' and are likely to fall further. But values in property shares have fallen faster and more dramatically than the underlying value of their property assets. The reason for this is sentiment. Investors have fallen out of love with property and expect more falls and have priced these into the share price.

Is it time to invest in commercial property shares?
By instinct i am a counter intuitive investor. When the herd is going one way, i like to go the other. I did this very successfully in the early 90's when the whole world expected that the UK was going to be in for a decade of falling house prices. I ignored the crowd and pre buy-to-let started buying residential investment property. This proved to be a good long-term call. Now i am doing the same with commercial property shares.

Commercial property has some very attractive qualities for investors which i like. They have a constant revenue stream from rent. In the UK this generally rises because most commercial property is let on upward only leases which means rents can only rise, even during the bad times. Therefore, providing that these rents cover finance costs and dividends an investors income is fairly safe. Property shares also obviously have a strong asset backing.

Should a landlord be buying commercial property shares or residential invesment property?
A landlord who is considering whether to buy further residential property investments or shares in property companies may want to consider the current relative valuations. Buying a residential investment property the gross yield if they are lucky would be likely to be 6% and the net yield 5% and an investor is paying the full asset value unless they obtain a BMV property http://www.propertyhawk.co.uk/index.php?page=magazine&id=214 Landlords investing in commercial property shares could be buying shares at 30-40% discounts to net asset value and with dividend yields net of any management costs of 10%. Which is the more attractive investment?

I will be looking at some commercial property shares that might be worth a look over the forthcoming months. Mean while if landlords have any observations or ideas feel free to post them to the blog.

In the meantime landlords may want to look at the Income Monkey blog for previous suggestions