Built to last

Each month we bring you the opinions of the managers of the funds most likely to be selected for pension portfolios through external fund links or Sipps. This month - gerry ferguson\'s SWIP property trust

Should property continue to be held as part of a pension portfolio? In short, yes. We believe private investors should hold their nerve and firmly believe we have a convincing case as to why they should continue to invest in this sector.

Looking back over the last nine months, we are very much aware that sentiment towards commercial property as an asset class has taken a knock and it appears that we’re not out of the woods just yet. The credit crunch continues to cast its shadow over the financial markets and concerns increase as to the health of the western economies. However for the long-term investor, willing to ride through the current property cycle, this asset class can offer attractive attributes and can play an important role when held as part of a balanced portfolio.

What are the attributes which make property appealing to the private investor?

The first is diversification. Its benefit as a diversification tool represents a strong argument for adding property to a traditional equity and bond portfolio, where it can help smooth out investment returns and reduce overall risk. It also offers an attractive income return, low volatility of returns and the expectation of a long-term total return somewhere between that of equities and bonds. For those investors looking to benefit from the attributes that direct property has to offer, the SWIP Property Trust is one of only a select number of funds available in the market that invests in direct commercial property, holding a cash element for liquidity purposes. In comparison to its peers, it has been the most efficient in protecting assets during the downturn in property sentiment and has produced robust returns during normal market conditions. To illustrate this point, during 2005 and 2006 the fund produced annual double digit returns of 17.81 per cent and 15.80 per cent respectively before the downturn of the market ensued. However in these difficult market conditions the strong focus on managing the portfolio effectively and growing the Trust’s income where possible, will ensure that the SWIP Property Trust continues to deliver for its investors.

In this current economic climate, much is dependent on economic performance and it is likely that rental growth will remain suppressed in the short term. The fallout from the credit crunch is having the biggest impact on office rents in central London with job losses in financial services causing lack of demand and rising vacancy rates. The retail sector is proving to be fairly resilient to date, although concerns do exist on the impact of tightening consumer expenditure in the short term.

While SWIP isn’t forecasting a property downturn similar in scale to the 1990s crash, our outlook remains cautious over the shorter term while global uncertainties remain. The reaction of the slowing occupational markets over the second half of the year will be key in allowing us to fully assess the health of the UK property market. Although we believe that the property market may be nearing the bottom of the cycle, it could be next year before the full effect of the wider economic downturn becomes evident. We believe that before we get there, property values are likely to fall further over 2008 before we see the market stabilising and producing positive total returns. Income yields will then be above cash and, with the prospect of longer term capital appreciation, property should start to deliver returns more in-line with its long run average. However, predicting the exact peaks and troughs of any market is impossible, as market movements tend to accentuate both.

The possibility remains that fears and uncertainties in the financial markets could hit the economy more than is presently anticipated. Property investment is a long term game. Quality properties and active management skills will be the key drivers to performance going forward.