Investor interest is growing in commercial property funds

Interest rates remain at their lowest on record,' making the returns available on commercial property enticing. Broadly speaking, there are three kinds of property funds, each with drawbacks and opportunities.

But remember, investing in property involves a lot more risk than holding cash. The investment could fall and you might not get back the amount you put in. Past performance is not a guide to future performance.

Funds specialising in direct property Investment are also termed 'bricks and mortar funds'. They are typically structured to pay an income derived from rental on properties held in the fund. Eventually, when investors withdraw capital, they should receive their investment, plus any capital growth (or less any loss) in the value of the properties themselves. One problem with these funds can be the delay in getting access to capital. But they provide returns which are closely linked to the commercial property market in terms of capital growth and income. Their assets are not publicly traded and are sometimes hard to value on a day-to-day basis.

A less direct way to access the property market is to buy shares in stock marketlisted large builders or property management companies - typically through specialist funds. When the market flourishes, so will such businesses. Investors receive income based on dividends from the companies, and - when they withdraw cash - any capital growth is based on the traded value of the shares.

These shares are normally easy to trade, so the liquidity of such funds is excellent. However, their price is usually linked to share prices generally.

Real estate investment trust schemes (REITS) are generally businesses listed on the stock exchange. Their primary function is managing a portfolio of income-producing properties. Most profits are typically distributed as dividends, and so their share price is normally linked to the portfolio value of the underlying properties. REITS are designed to offer the liquidity of stocks, and close ties to rental income and property prices. In practice, they score well but not perfectly on both counts. However, the market is new and somewhat untried, and offers limited investment choice.

UK commercial property has shed up to 40% of its value in the past two years,2 but if the worst is over, and you are thinking of investing, it is important that you take advice.

1. Bank of England, 08/1 0/09.
2. Financial Times, 21/08/09.