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In the present economic situation it is extremely important to ensure you have a well-balanced and risk-free portfolio.
At present portfolio managers will be looking for an initial yield/income return, overall from the whole portfolio, of around 4.5% and the remaining 1.5% or thereabouts should come from capital growth. The growth comes from a combination of two things: rental growth and a “hardening” of yields – or both. In the case of, say, West End offices, they are predicted to show the best rental growth of any sector over roughly the next three years and so capital values will go up. For example, the capital value of a property producing £50,000 per annum will be higher if the rent goes up to £70,000 a year.
On the other hand, the M25 and regional offices are out of favour with investors at the current time. If, in the next few years, there is unlikely to be much rental growth, that may not be of enormous concern as, by getting 10% income return the property is already giving you the required IRR (internal rate of return). If M25 offices come back into fashion at some point over the next ten years, then you could see a double benefit as the yield comes in from 10% to say 7% .
In the case of supermarket investments, they usually only yield around 6% but very often they have within their leases fixed uplifts based on RPI (retail price index) every five years to give you the growth. These investments are for long-term security and to provide a solid return at minimum risk.
Industrial estates provide an income return typically of around 8%. They are management intensive, however, with tenants coming and going which means there is higher risk involved in these investments than in supermarkets. However, by “working” these investments it is possible to create your own rental growth. This can be done by letting one of the units at a higher rent, which has a knock-on effect on the rest of the estate. Also, refurbishing units if they become vacant on the estate gives another opportunity to add value.
Last year West End shops showed the best rental growth of any sector. With the Olympics there was even more focus on the West End and with house prices continuing to climb because of very wealthy foreigners buying property in London, the belief is that the West End retail sector should continue to perform. In addition, if you may eventually wish to sell a property in order to reinvest, then it is important to have a little bit of the portfolio as liquid an asset as possible. Over the years, whatever the market conditions, West End shops have always been the easiest asset to sell.
By looking at this type of varied portfolio, there are some good secure investments whatever the market, and some investments where you think the best rental and capital growth will come from – for example, London offices. Then you have other investments which offer an attractive income return: industrial estates which provide opportunities for improving the income and capital value through active management such as re-gearing leases or refurbishment of existing buildings on the estate.
Morgan Pryce is a specialist tenant acquisition agent with offices in Oxford Circus and the City. Morgan Pryce specialises in search, negotiation and project management and works exclusively for tenants.