Investing in commercial property

There's a big debate as to whether the recent boom in residential property is sustainable. But it is obvious the economic recovery is having a knock-on effect on commercial property.

Growing business confidence and increasing employment is pushing up demand for office space. Even the previously beleaguered high street is doing better, thanks to an increase in retail sales.

With the UK's current recovery likely to be maintained by hook or by crook until the election at least, investing in commercial property makes sense from an income perspective, too.

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With the market still not fully recovered from the financial crisis, yields remain attractive, especially compared to residential housing. Insurer Aviva reckons that commercial property could deliver returns as high as 15% over the next year, via income and capital gains.

One potential way to play this is the M&G Property Portfolio, run by the experienced Fiona Rowley. Its holdings are weighted towards offices in outer London and the South East. The fund is also overweight in industrial property, which should benefit from "re-shoring" as higher wages elsewhere drive companies back to the UK.

It also owns a large number of retail warehouses, but is deliberately avoiding Central London offices and supermarkets. Only 2.1% of its office space is vacant (versus the 7.7% average for the sector).

The fund has beaten its benchmark over a one and three-year period, and has an annual management charge of 1.5%. Another option is Henderson UK Property. This trust is much more London-focused, with its largest holding in St James (next to Piccadilly).

It aims to buy more prime London assets, and with a fifth of the portfolio currently in cash, it has the scope to do so. Overall, it has performed strongly, rising by 18% in the last three years. Again, the annual charge is 1.5%.

An alternative (and cheaper) way to invest in UK commercial property is through the iShares UK Property UCITS ETF (LSE: IUKP). This exchange-traded fund doesn't own any commercial real estate directly. Instead, it holds stakes in listed commercial property, investment companies and real estate investment trusts (Reits).

One big benefit of this approach is that the total expense ratio is only 0.4%. It currently pays a solid dividend yield of 2.2%. The one downside is that it is relatively concentrated, with the three largest holdings (Land Securities, British Land and Hammerson) accounting for nearly half of its portfolio.