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Brexit: a boon not block to London investment in 2019

There is firm evidence of what market participants are witnessing every day with their own eyes – that Brexit has not scared overseas investors buying commercial real estate assets in the capital.

It is not a case of the market struggling on ‘despite Brexit’. Rather than dampen the enthusiasm of foreign investors, Brexit has had the opposite effect.

Several overseas property investor clients highlight the weaker British pound as a reason for their continued heavy investment in the London property market. Many foreign investors have seen the UK government actively discouraging foreign investment in residential properties, for example by increasing stamp duty land tax (SDLT) rates for additional residential properties and residential properties purchased by companies, and have in turn switched their sights to commercial property – for which SDLT rates are significantly lower.

We can see this continued interest illustrated in some of the high-profile office acquisitions of 2018. In June, a Hong Kong-focused property developer snapped up the London headquarters of UBS, and a couple of months later, South Korea’s National Pension Service purchased Goldman Sachs’ European headquarters for £1.1bn.

It is not surprising that a significant portion of foreign investment in the London property market is in the commercial office sector. The West End is ranked the second most expensive rental office market in the world, with the City not far behind at number 10. The rise and rise of shared office space, spearheaded by WeWork – a privately owned US company – highlights the new ways that foreign investors are tightening their grip on the London office market even as the clock ticks down to Brexit.

2019 promises more of the same – more big ticket deals, more shared office capacity and more investors making moves into the capital’s commercial property – with significant cause for optimism right across the market.

Source: Property Week

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Forget buy-to-let! Consider these commercial property investments instead

A growing number of buy-to-let landlords have been moving towards commercial property following recent regulatory and tax changes that have made investing in residential buy-to-lets less attractive. The characteristics of commercial property are, however, different to residential property. For starters, investments in retail and office property generally require greater amounts of capital and specific technical expertise.

Commercial properties are also regarded as higher-risk investments, due to typically higher average vacancy rates, which can make it difficult for ordinary investors to rely on a single property investment for income. Instead, most investors would probably be better off pooling their money with other investors, via a property investment trust or a REIT, as this will allow you to benefit from added scale, diversification and the skill of the fund manager in looking after your investments.

Keeping that in mind, here are three commercial property investments that deserve a closer look.

Diversified portfolio

With total assets of nearly £1.5bn, the F&C Commercial Property Trust (LSE: FCPT) is one of the UK’s largest actively managed closed-ended companies investing directly in commercial property.

F&C aims to provide investors with an attractive level of income from a diversified portfolio of prime commercial property assets. The managers invest principally in three commercial property sectors: office — retail and industrial — focusing on investments that they believe will generate a combination of long-term growth in capital and income for shareholders.

The managers have a strong track record of delivering robust returns to its shareholders, after having generated a net asset value (NAV) total return of 82% over the past five years. There’s great income appeal too, with the company paying monthly dividends that currently annualise at 6p per share, giving prospective investors a yield of 4.2%.

Less retail exposure

Looking ahead, it may be a good idea to find a property company with less retail property exposure. With bricks and mortar retailers continuing to cede ground to online sellers, investors are becoming more sceptical towards retail property valuations.

With that in mind, Picton Property Income (LSE: PCTN) may be a better pick. It has just 23% of assets weighted towards retail and leisure, compared to 43% for the F&C Commercial Property Trust. And in place of the company’s lower exposure to retail, Picton is tilted more heavily towards the more resilient industrial and warehousing sector, which accounts for 41% of total assets.

Unsurprisingly, its portfolio construction has served it well of late. The company’s total return for the 12 months to 30 June 2018 was 14.2%, which was roughly double the return achieved by the F&C trust over the same period.

REITs

The REIT space is another good place for investors to look right now, as a number of property giants are trading at big discounts to the value of their underlying assets.

For example, shares in London-focused Derwent London (LSE: DLN) trade at a 21% discount to NAV, for no other reason aside from the weak investor sentiment towards office space in the capital. Analysts reckon the office market in the capital is particularly vulnerable to a ‘no-deal’ Brexit outcome, given the city’s outsized exposure to financial services.

Nonetheless, Derwent London continues to deliver steady earnings growth, with underlying earnings up 14% in the first half of 2018, to 51.8p per share. And on the back of this, the company raised its interim dividend by 10%, to 19.1p per share.

Source: Yahoo Finance UK