Take the long-term view

The UK commercial property sector witnessed a well-documented slowdown in the six months to December 2007, mostly fuelled by the turmoil in the financial markets.

This uncertainty resulted in increased redemp-tion levels in all types of pooled property funds in the fourth quarter of 2007. This switch to cash was also evident in the bond and equity markets.

Data provided by AREF's 64 member funds showed redemptions totalling 3.83pc of net asset value (£1.65bn) for the last three months of 2007. In the same period more than £400m of new money was raised. Over £3.7bn of new money was raised in the 12 months to December 2007 giving a net inflow of £200m for 2007.

While the market re-priced sharply at the end of 2007, partially a function of the wide availability of accurate market data, such as that provided by AREF and IPD, Spring 2008 brings a much more positive picture.

This now constant flow of accurate data has enabled the sector to find its feet more quickly than in previous cycles. It is important also to consider that this market correction differs from that in the early 1990s, as it does not follow a development boom and comes in a low inflation and (relatively) low interest rate environment.

While deal flow has slowed and prices being achieved for direct property investment transactions are below market levels of 12 months ago, some of the most astute property investors are already back in the market. History has taught that when you buy in a recession - imagined or real - it does not take long for that contra-cyclical move to look very smart indeed.

The question for pension fund investors remains - should I be investing in UK property in 2008, and how should I invest my money - listed or unlisted, direct or indirect?

While it is difficult to judge whether commercial property values are likely to fall further, investors need to bear in mind that there is money from sovereign wealth funds from the Middle and Far East, US private equity and many UK and European institutions looking closely at the buying opportunities in the UK property market.

Due to cash outflows there are attractive prime assets - city offices, shopping centres and well located, long let industrial units currently for sale that rarely come onto the open market.

These are all good signs for the UK indirect commercial property market, which despite negative press at the end of 2007 has seen a number of new funds launched in early 2008, as professional investors look to take advantage of current market opportunities. Schroders has announced the launch of a £1bn opportunity fund to invest in UK commercial real estate and Valad Property Group has teamed up with Bank of Scotland to create a £500m fund. Other institutions are set to follow suit indicating that the demise of the property sector has been much exaggerated, and pooled funds should remain a long-term hold for the majority of UK pension funds.

This launch of new funds in Spring 2008 demonstrates confidence in the long-term performance of pooled property funds and the characteristics they exhibit. Looking at the 17-year risk/return profile of unlisted pooled property funds relative to other asset classes, it is interesting to note the long-term returns from direct property versus pooled property funds. The results show that over the 17-year period, pooled funds have delivered the return with risk characteristics of direct property.

The long-term fundamentals of pooled property funds remain strong - namely diversification, a low correlation and good long-term performance/risk adjusted return compared to other asset classes.

Rachel McIsaac is chief executive at the Association of Real Estate Funds