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Commercial Property
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Risks you should consider
No investment is a one-way bet and property prices, like those of equities and bonds, may go down as well as up. You should consult a financial adviser before considering investing. The following considerations should always be borne in mind.
Capital intensive
Investment in a single commercial property can run into millions so there can be significant exposure to the quality of that one holding. This exposure can be mitigated within a fund large enough to hold a broad spread of property types and locations. You should note, however, that there may be less diversification than in a typical equity or bond fund.
Tenant default
One of the advantages of commercial property is that a large proportion of the return is fixed in the form of contracted rental income. There is always a risk, however, that tenants can default on payments. Fortunately – and unlike bonds where, in the event of default, both income and capital may be lost – income streams can be reinstated by re-letting. This, however, may take time and will affect the income yield of the fund.
Low liquidity
By its nature, commercial property is a less liquid asset and values could be seriously affected in the event of the need to sell in a short timescale. This is a specialist investment sector and, although supported by solid levels of income, can nevertheless be volatile in adverse market conditions. As a result, property funds must take precautions to ensure constant liquidity.
Valuations
Unlike shares and bonds, where 'pure' market forces of supply and demand determine valuations through daily dealings, property price valuations are largely determined by independent experts and are a matter of their expert opinion. Only the actual sale of a property can be relied upon as an unequivocal means of valuation. As with any asset-backed investment, values can fall as well as rise.
Failure to renew
There is a risk of the loss of income from a property if the tenant chooses not to renew the lease on expiry. Good property management can minimise the effects of this risk.
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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.
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