In the past, most charities' investment portfolios have consisted mainly of equities and bonds, but in today's volatile economic environment it has never been more important for charities to hold a diversified portfolio of investments. One of the best performing asset classes over the past three, five and ten years has been commercial property, which can help add an extra element of diversification and stability to investment portfolios for several reasons.
Firstly, commercial property has historically been a less volatile investment than equities or bonds, providing a steady income of around 7 per cent per annum. This is largely attributable to the fact that in recent years, up to 80 per cent of the total return (income and capital) has been derived from rental income.
The income is also relatively predictable and even in times of economic uncertainty when companies may issue profit warnings and suspend dividend payments they should still be paying their rent, which tends to be a prior charge payable quarterly in advance.
Unlike other investment classes, property represents a tangible, real asset. Therefore, instead of simply being restricted to buying and selling, investors can improve returns through active management of their investments. This can include, for example, refurbishment and extension of a property or a change of planning use to a higher value use. It might also include taking a surrender of a unit in a multi-let property in order to secure a new letting at a higher rent thus creating rent review evidence for the other units.
Pooling Property Assets - The Advantages
Property is a capital intensive asset requiring critical mass to maximise returns and minimise risk - we estimate that the minimum size of property portfolio to achieve these objectives is some £30 million.
Hence, for the majority of charities, which are unable to run their own segregated portfolios of such size, investment through pooled vehicles is perceived to offer many advantages:
Property Diversification - First and foremost, by pooling their interests the charities can participate in much larger portfolios which provide the required diversification by type and geographical spread;
Asset Diversification - By holding units rather than large, “lumpy” individual buildings charities can reduce their overall exposure to the sector so reducing their overall risk position;
Lot Size - Larger pooled portfolio can acquire larger buildings than charities acting on their own account. This will improve overall performance as large properties out-perform smaller properties;
Management Time - Property investment is a management intensive, specialist field. Investment through pooled schemes reduces this onerous burden for Trustees while enabling access to specialist property investment managers; and
Stamp Duty - Charities are exempt from the 3% Stamp Duty charged levied on all property investments over £0.5 million. By acting collectively, in a special charity vehicle, this will give them a clear performance advantage.
Those few charities of sufficient overall size able to run their own property portfolios can achieve for themselves all the benefits outlined above. For the majority of schemes, however, it is only through a pooled approach that they will achieve the similar rewards of investing in property.