It's easy to forget that only ten years ago the UK base interest rate was 5.75% and yet today, even after the recent rate rise, it stands at only 0.50%. Investors who wanted to take no risk could open a savings account in 2007 and expect 6% returns - at least twice the inflation rate, which was running at 2.3%. Today those same UK savers are lucky to get 1.3% from their savings accounts and yet inflation stands at 2.9% - a guaranteed loss of at least per annum!
It is little wonder therefore that income hungry investors have increasingly looked far and wide for alternative sources of income as interest rates have fallen. Popular asset classes such as high yield corporate bonds and commercial property have been major beneficiaries of this hunt for yield and as a result their valuations have been inflated accordingly. As their values have increased, so their corresponding income yields have fallen. this has then forced those same investors to search again for higher yields elsewhere.
In this overview we consider the UK commercial property market and specifically examine the impact on this asset class of the search for higher yield. Whilst we've covered the sector in previous reports, there has been massive momentum recently and this has triggered a wave of new fund issues with far more esoteric investments mandates. These new launches have had to look at more unconventional routes to generate their income because mainstream commercial property assets have been so over bought that the yields that investors so covet are now not very attractive. We compare the conventional property funds to the new young upstarts and consider whether any of the new breed are worth following.