Monday, 10 November 2014

The Fear of Uncertainty, and

New City High Yield Income Fund Ltd


Image is courtesy of Wikipedia
Uncertainty, what uncertainty? The Vix index of share volatility is running close to its all-time low, the price of gold is 38% below its 2011 high, while the S&P 500 is flying high. Investors, as measured by the AAII Investor Sentiment Survey, are unusually bullish with bulls outnumbering bears by 3.5 to 1.
Yet for the seasoned, long-term investor the future is more uncertain than usual. Consider the possibilities:
Scenario A - The Goldilocks Economy
Most investors are feeling positive. The American and British economies are growing and unemployment is falling fast. Abenomics seems to be transforming Japan, while even the EU, thanks to its central banker, is no longer a big worry. It is only a question of time until economic growth, interest rates and inflation return to normal levels, and we're back to the pre-crisis Goldilocks economy  (her porridge was neither too hot nor too cold, but just right). In this scenario, it makes sense to concentrate one's investments in the sector which has most to gain - equities.
Yet the experienced investor recalls that the earlier Goldilocks economy ended in the greatest recession since 1945. The stock market crashed and it took six and a half years for the FTSE All-share Index to recover its previous peak in nominal terms. In inflation adjusted terms, the stock market is still about 10% below where it was in April 2007.
Scenario B - Back to the 1970s
Investors who saw their capital eroded by double-digit inflation in the 1970s and early 1980s, peaking at 25% in 1975, have the lingering fear that such times could return. Then prices tripled. Gilts prices fell in real terms by three-quarters in the decade and equities by 16%. Gold, on the other hand, quadrupled in value and oil tripled in value in real terms. Cash was trash. Bonds were trash. If you didn't buy property, gold or oil, you were best off in equities.
Ø  Will the vast increase in money supply via so-called 'quantitative easing' eventually lead to a repeat of 1970s inflation or worse? The consensus among economists, as in a recent article in The Economist, is that it hasn't and so it won't. But economists have such a poor record of predicting outcomes, that the investor would be foolish to put all his money on them. In the high inflation scenario, a mix of equities, property and commodities (particularly gold and oil) provides the best defensive portfolio.
Scenario C- Deflation and Stagnation
Ø Will we enter a period of deflation? No one in the West has experienced the impact of deflation on economic activity in living memory. Yet deflation is not far away. In the Eurozone prices are rising at 0.3%, in the US by 1.7%, in China by 1.6% and in the UK by 1.2%.* Buttonwood, in this week's Economist, fears that deflation looms. Our main reference is Japan, where 14 years of gentle price declines coincided with massive deflation in asset values, a shrinking GDP per capita, and abnormally low interest rates. *July to September quarter at annual rate, source The Economist.
Ø  Will economic growth continue at its present low level? Real world GDP growth, which averaged 3.3% in the ten years to 2007, averaged 2.2% in 2012 and 2013. And the outlook is murky, in part because China's growth rate is falling fast. In a recent article in the Financial Times, Summers and Pritchett of Harvard reckon China's growth rate will fall to 4% per annum for the next two decades. This compares to 9.1% p.a. in the ten years to 2007.
Ø  Will interest rates remain abnormally low? 10-year government bonds yields are at historic lows - 2.35% in the US, 0.46% in Japan, 0.9% in Germany and 2.54% in the UK - while central bank rates are near or are at zero. And government bond yields are still falling.
Ø  When will government debt start falling? Net government debt in the advanced economies has increased from 46% in 2007 to 78% in 2013, according to Economy Watch. And it is still rising.
If the world's economy does stagnate and we are in for a long period of stable or deflating prices and ultra-low interest rates, then the corporate sector will suffer. Revenues will stagnate, as will profits and investment. The best defence is to own debt. As cash yields next to nothing, government 10-year bond prices are at all-time highs, and equities will not live up to current expectations, it pays to look elsewhere for a steady income.
With these uncertainties, the individual investor should consider investing for all three scenarios to reduce the portfolio's risk. While reducing risk incurs the cost of lower returns, it should provide the investor with smoother, less volatile returns. And investors will sleep better at night, though they should be alert during the day. While I invest for the long-term, thirty years in my case, I am alert to the fact that events can change overnight. And the portfolio mix should be reviewed regularly in the light of changing scenarios.
A possible portfolio could include:
1. Equities. Companies are always reluctant to cut dividends when trading is weak and generally increase payouts when trading recovers. Over almost any extended period, the 2012 Barclays Equity/Gilt study shows that equities outperform bonds and cash (see an earlier article).
2. Gold and Oil are two commodities that offer defensive qualities and are fairly independent of the financial markets. While I prefer oil to gold, gold has a long history of protecting wealth in inflationary periods. This is discussed further here.
3. Alternative income producing investments, such as UK commercial property and Japanese residential property, the subjects of my previous two articles, offer a steady source of income that is relatively independent of the vagaries of the stock market.
4. Corporate preference shares and bonds continue to yield income, unlike government bonds, well in excess of inflation. These high-yield fixed return investments come into their own in a stable price, slow growth economy. To obtain a good spread of such securities, it makes sense to opt for a collective investment. I have explained why investment trusts are a superior vehicle to open ended funds or exchange traded funds for most equity investments. The same arguments hold good for corporate fixed income. One such investment company is the New City High Yield Investment Fund.

New City High Yield Income Fund Ltd

Sir Michael Hintze, founder, courtesy CQS website
Since CQS took over the New City High Yield Income Fund Ltd (NCY) in 2007, the fund has done what it set out to do - provide a capital gain with low volatility and a growing income for its investors. It has been helped by the low interest rate, low inflation environment. As such, it provides the investor with a good defence against the deflation and stagnation scenario.
The price (in blue) and net asset value (NAV in red) of NCY has bettered the FTSE 350 High Yield index (in olive green) over the past five years:
NCY price and NAV compared to FTSE 350 high yield in green, courtesy Investors Chronicle, click to enlarge
NCY has been managed by Ian Francis of CQS since 2007. He and his team have invested in bond-like instruments in companies that are located in jurisdictions with a good record of ethical behaviour and legal integrity. It is heavily weighted to the UK and sterling. And the fund's debt amounts to just 8.6% of its equity.
At the current offer price of 64p, NCY trades on a 5% premium to net asset value and yields 6.5%. It is incorporated in Jersey and is listed on the main market of the LSE. NCY has a market capitalisation of 192 million pounds and a total expense ratio (TER) of 1.2%, which includes the annual management fee of 0.8%.
NCY is, within the high yield sector, conservatively managed:
Ø  The fund is widely spread geographically in developed markets. 60% of its assets are in sterling, 21% in US dollars, 8% in Euros and 6% in Australian dollars. The remainder is denominated in Swedish, Norwegian and Swiss currencies. NCY has no exposure to emerging markets, where the risk of default is higher.
Ø  NCY is heavily invested in bonds (76% of assets) with the remainder in preference shares (11%) and convertibles (5%) and just 8% in equities.
Ø  The fund is invested in 137 different issues. The largest, Phoenix Life Floating rate note 2021, accounts for only 3.6% of the total. All issues are backed up by listed companies.
Ø  Dividends paid to investors are covered by revenue earnings per share, allowing capital gains to be reinvested. The fund has a revenue reserve of 3.5p a share that would allow it to continue to payout dividends at the current rate were revenue income to fall.
Ø  Gross debt is just 8.6% of equity.
Ø  The company manages its premium and discount to NAV, thereby dampening the volatility of its share price. Also, by selling new shares at a premium and buying back issued shares at a discount, NCY increases the NAV for its shareholders. It placed 30 million pounds of shares in December 2013.
Ø  It helps that one of NCY's board members, with 1.8% of its equity worth 3 1/2 million pounds, has a large stake in its future. And seven institutional investors hold a further 44% of its issued capital.
NCY presently trades at a premium of 5% compared to its latest NAV of 61.2p a share. This is at the lower range of the premium that the fund habitually commands. NCY rarely trades at a discount to NAV.
NCY premium/discount to Net Asset Value, courtesy Investors Chronicle, click to enlarge
Investors will note:
1. As a predominantly fixed income fund, NCY would perform badly if inflation and central bank interest rates were to head considerably higher. NCY is a bet that central banks in the US, UK and EU primarily, keep inflation within their targets, which are around 2 to 3%.
2. It is possible that a prolonged period of very low sovereign bond yields will reduce the income that NCY obtains from corporate borrowers. On the other hand, in this case, the capital value of the fund should rise.
 3. The possibility of default should always be in the mind of the investor in debt issues. While its present portfolio looks fairly solid, it would be a miracle if NCY avoided default at some point on one of its 130 holdings. In a severe financial crisis, NCY's portfolio is at a far greater risk of default than holders of sovereign debt in the countries in which it is currently invested. The investor must assess whether NCY's superior yield - 6.5% compared to 2.5% for a 10-year Gilt - is worth the risk.
Disclosure: I hold no position in NCY.

Thursday, 30 October 2014

Is it time to invest in Japanese housing?

And Japanese Residential Investment Company Ltd


View of Shinjuku Ward, Tokyo, courtesy Wikipedia
For the contrarian investor, the Japanese housing market is appealing. After all, could it be worse? House prices have been sliding for the last 24 years. The Japanese economy has not lost one decade, but two and a half decades. Deflation means that the consumer price index is below where it was in 1999. The yen has lost 27% of its value against the pound in the past year. The nation has the fastest ageing population in the world. And net public debt stands at 134% of GDP, which is second only to Greece. 
But the contrarian investor sees a cup half full. After 24 years of declining house prices, houses cost one-third of what they cost in 1990. Abenomics, as the Prime Minister's free spending and loose monetary policy is called, has pushed inflation* to 1.1% this year and unemployment is at a 17-year low. The pound buys more yen than at any time in the last six years. Household numbers continue to grow. Meanwhile property companies can borrow funds at less than one percent interest.
*Core inflation excluding taxes.
Residential Property
The bubble in Japanese house prices is captured in this dramatic graph:
Graph courtesy, click to enlarge
In the space of six years, house prices almost tripled. Then came the housing crash, which coincided with the crash in the Japanese stock market. Today, house prices are 67% below what they were at their peak, in 1990.
However, according to the Japanese land registry, the fall in house prices is levelling out. Condominium prices (in olive green) have staged a steady recovery since early 2009, while the price of detached houses (in blue) continues to fall:
Graph courtesy website, click to enlarge
The Japanese housing market has some special characteristics:
Ø  Between 1990 and 2010, the number of households has increased by 27%. Family units have become smaller and the population has continued to grow.
Ø  The decline in the size of families means that apartments are increasingly in demand, at the expense of family houses.
Ø  The rental sector at about 36% of households is large, more than double the UK's.
Ø  Housing has a short lifespan. People are concerned about how older buildings resist earthquakes and there is a fetish for things new. Concrete buildings are often replaced after thirty years or so. Then, the residual value of the property is its land value less the cost of demolition.
Ø  10-year mortgage interest rates are at an all-time low of 1.2% (as set by The Bank of Tokyo-Mitsubishi UFJ, Japan's largest mortgage lender).
Ø  Gross rental yields average between 5 and 6% in Tokyo for a 120m2 flat in a prime location. This is superior to London, where gross yields for a similar flat average little over 2% (Global Property Guide)
Ø  Tenants pay their rents. One residential property company reports that only 0.1% of its rents are in arrears.
According to the recent Economist survey of global property, Japan's house prices are undervalued by 37% when compared to rents and by 39% when compared to incomes. Japanese housing is the most undervalued of the 23 countries selected for the survey.
The value of the Yen
The yen reached its all-time high against the pound in January 2012. Since then it has devalued by 32%, and one pound currently buys 173 yen. The yen has not been cheaper in sterling terms for the last six years:
Graph of yen per GB pound courtesy Yahoo, click to enlarge
The weakness of the yen has more than one explanation.
1.       After the March 2011 tsunami and the meltdown at the nuclear reactor at Fukushima, the government closed down all the country's nuclear power stations. Japan had to import fossil fuels to compensate for the 26% of the nation's energy from nuclear plants that had been closed. Japan's traditional balance of payments surplus turned to a deficit in late 2013.
2.       One of Abenomics key policies was to reduce the value of the yen by monetary stimulus that included reducing interest rates to near zero. This was designed to favour exporters and encourage investment in capital equipment.
3.       The combination of a falling currency and ultra-low interest rates stimulated the carry trade. Speculators borrow in yen to invest in higher yielding securities in other countries, thereby further depressing the value of the Japanese currency.
While Japan is restarting most of its nuclear power plants and the balance of payments is expected to return to surplus, easy money, low interest rates and the carry trade will probably continue. The yen is unlikely to stage a comeback soon. While a cheap yen would depress the value of residential property when translated into sterling, it also seems to be reviving the Japanese economy. This would lead to a recovery in house prices.
With healthy yields and prices that are low by historical standards, Japanese residential property provides a good alternative investment for the individual investor. But one wouldn't want more than about 5% of one's portfolio invested in Japanese property.
It is one thing to identify a plausible investment in an alternative asset class, but it is another thing to identify a suitable investment vehicle for the individual investor. UK investors have an investment company that offers a straightforward way into the housing market in Japan. It is the Japanese Residential Investment Company.

The Japanese Residential Investment Company LTD (JRIC)


Spacia Akihabara, Tokyo, courtesy JRIC
The Japanese Residential Investment Company (JRIC) was launched in 2006 to invest in completed units of residential housing in Japan, which it then rents out. The company is based in Guernsey and is currently listed on the Alternative Investment Market (AIM). In June it announced its intention to move its listing to the London Stock Exchange's Main Market.
At the offer price of 56p, the company trades on an 8% discount to net asset value and yields 6.4%. My valuation model does not work well for property companies.
JRIC is run as an investment trust, with a board of directors appointing an investment advisor to identify suitable properties for investment and to manage the estate. The advisor, K.K. Halifax Asset Management, is a sister company of Colliers International which was established in Japan in 1952.
The company owns 58 apartment buildings, the largest of which is Spacia Akihara in Tokyo. 94% were built in the last 5 to 10 years and 67% of the units are either studio or one-bedroom apartments. JRIC set out to concentrate on the main conurbations, where demand is highest, and 59% of its space is in Tokyo, while a further 29% is to be found in Osaka and Nagoya. All their buildings comply with the latest (1981) anti-seismic building standards.
Occupancy rates are high, at 95.1%, rent arrears are just 0.1%, and the largest single tenant accounts for just 0.4% of JRIC's rental area. Still JRIC had a rocky start. Soon after its launch asset prices were hit by the financial crisis and, as it was highly leveraged, it was forced into a deeply discounted rights issue. This is discussed by City Wire in a 2012 article. The shares (20-day moving average in red) crashed to one-third of their issue price:

20 day moving average JRIC share price Vs FTSE 100, courtesy Yahoo, click to enlarge
JRIC shareholders were hit by falling asset prices compounded by a yawning discount to the net asset value of its properties. This discount, briefly exceeding 60%, has now largely disappeared as investor confidence in the company has returned.
JRCI Premium/discount to NAV, courtesy the Investors Chronicle, click to enlarge
In terms of yen, JRIC is doing quite well. Consider:
·         By being wholly invested in modern apartment blocks, the type of residential property in most demand, JRIC's net asset value increased by 7% in 2013 and by an annualised 4% in the first half of 2014.
·         JRIC made a profit of 2.1 million pounds on disposals in 2013, which represented a 24% premium to their assessed value.
·         Operating earnings per share in yen from the rental business declined by 3.5% in 2013, but in the first half of 2014 it exceeded the comparative 2013 period by 21%.
·         The dividend payout of 21 million pounds in the past four years has been amply covered by net operating cash flow of 31 million pounds.
·         Loan to value is 59%, which is 12 percentage points below where it was pre-crisis. The company has reduced its weighted cost of borrowings to 0.9%, which gives it a huge margin compared to rental yields. In 2014, JRIC took out a seven-year 40-million pound loan (denominated in yen) with a maximum blended interest cost of 0.9%.
As the investment advisor receives a commission of 0.5% on gross assets and the cost of borrowing is so low, there is always the temptation to borrow more. Hopefully the directors are now much more cautious than they were in 2008, and if not, five institutional investors, holding 55% of the company's shares, are there to remind them. Ruffer, known for its total return fund, has held a major holding in the company since 2007 and now owns almost one-quarter of JRIC's outstanding shares. 
As an alternative investment to stocks, bonds and cash, JRIC offers the individual investor some real diversity:
1. Residential property is less volatile than commercial. JRIC's investment in apartment buildings puts it into the most favoured sector of the residential market. And by renting solely to individual tenants, the risk of default - tiny in any event in Japan - is further reduced. That Ruffer holds 23% of its outstanding shares is an indication that JRIC offers the investor a return that is largely independent of the financial markets.
2. Japanese housing is cheap, by historical standards, and at some time it seems likely to recover.
3. The combination of a 6.4% running yield and the 8% discount to net asset value is far superior to the average for its Japanese equivalents that yield 3.4% and trade at a 34% premium to NAV. Both the yield and the discount offer protection against adverse movements in the residential property market and borrowing costs.
4. While the yen might well remain weak for some time, it is likely to recover at some point, which would boost the value of JRIC's portfolio and earnings in sterling.
5. The company's move to the LSE's Main Market will undoubtedly be accompanied by further raising of capital to expand the business. This could be positive for shareholders. Its relatively small size - JRIC is capitalised at 117 million pounds - and its listing on AIM might explain part of the reason for its lowly valuation.
Investors will note that the risks are:
Ø  JRIC does not hedge the yen - pound exchange rate. Further yen devaluations would reduce both the NAV and earnings of the company's portfolio in sterling.
Ø  If Abenomics fails, the Japanese economy could slip back into deflation, which could hit both rental yields and property prices.
Ø  The Japanese place little value on housing that is over thirty years old. As JRIC's properties age, they become less and less valuable until they have to be replaced. This cost is not built into JRIC's accounting. However, "The fair values of investment property are determined annually by independent qualified valuers using the income capitalisation basis and the discounted cash flow method." (2013 Annual Report)
Ø  Interest rates are at an historic low. Given the high public debt to GDP ratio, it is likely that borrowing costs will rise once the present loose monetary policy ends. This would reduce the company's operating earnings.
Ø  JRIC over-extended itself before the financial crash of 2008-9, with disastrous results for its shareholders. Something similar could always happen again.
Disclosure: I hold a long position in JRIC.

Monday, 6 October 2014

Commercial Property - time to invest?

And UK Commercial Property Trust PLC


One Canada Square, courtesy Wikipedia
Commercial property can be a risky investment. Canary Wharf's One Canada Square bankrupted its developer, Olympia & York. And the financial crisis took a huge toll on property companies. The funding crisis forced many companies into emergency rights issues and the hasty sale of properties. As a result, commercial property prices plunged by 44% between June 2007 and July 2009. Some property companies went into liquidation. Shares in even the largest, British Land and Land Securities (Land), lost 75% and 79% of their value respectively.
Excessive leverage exaggerated the fall in property shares. When Lands' net assets fell by 58%, net debt, which in March 2007 seemed a reasonable 48% of net assets, suddenly became 131% of net assets. The company had to sell property in a falling market. And, to avoid breaking its loan covenants, Land resorted to a 756 million pound rights issue in February 2009 at the bottom of the stock market.
Commercial property prices staged a partial recovery, but the damage to property companies was long lasting. Land's share price is still 56% below its pre-crisis peak.
However, under normal conditions, commercial property offers the long-term investor a steady and growing source of income via rental reversions plus an increasing capital value - data from
% annual return on capital*
    1980 to 2013
    Last 10 years
All property
Property equities
UK Gilts (Barclays equity/gilt study)
                *Capital plus reinvested income. The all property figures are based on gross returns, not net.
In the wake of the financial crisis, leases were broken or renewed at lower rentals. Land Securities, which provides like-for-like rental returns for its own properties, suggests that rents, after five years of decline, have started to recover:
Year to March
Rental returns*
Real GDP/capita**
* Land's like-for-like rental income compared to the previous year. **Lagged one year.
The fall in rents appears to be over, as Land has reported for the 12 months to March 2014. How can the individual investor best capitalise on this turnaround?
1. Exchange traded funds (ETF). The only ETF in the UK Commercial Property sector is the iShares UK Property UCITs. This ETF tracks companies in the property sector, not underlying property values. Consequently, it adds another layer of costs to the sector (0.4%) and does nothing to reduce gearing. It also yields only 2.3%, compared to the FTSE Real Estate Investment Trusts Index of 3.3%. 
2. Open Ended Property Funds. The financial crisis laid bare the flaw in this model. Investors rushed to redeem their holdings, and the illiquid nature of property meant that many funds were forced to halt repayments while they sold their assets at knockdown prices. Investors had to wait six months for their cash and then it was much less than they had anticipated.
3. Property companies and investment trusts. Directly investing in quoted companies is the best route for the individual investor. However, when choosing a company, it would be wise to consider:
Ø  The level of debt. Managers are tempted to gear up a company in the often-justified belief that property values will increase at a greater rate than the cost of finance. However, as the last property crash illustrated, this can be very risky. This is particularly the case when the funding is short-term - property can be hard to sell in a crisis.
Ø  The share's premium or discount to net asset value (NAV). Evidently it is best to buy at a discount to NAV. However, the best run property companies command a premium to NAV while those that trade on a discount often do so for good reason. As share price premiums are fairly volatile, the current premium - or discount - should be compared to its historic average.
Ø  The dividend is paid out of net rental income. Property companies and investment trusts often pay a dividend that is well in excess of the net profit from renting properties. Paying part of the dividend from capital is not sustainable.
Ø  Market capitalisation. Given that properties are high value investments, companies require substantial funds to offer some degree of diversification. Anything less than 100 million pounds is small by this yardstick.
Ø  Retail, office or industrial? And location? Depending on a wide range of factors, property valuations vary between different sectors and different locations at different times. While the property professional expends much energy on the subject, the individual investor should accept a degree of ignorance and invest in a company that spreads its investments over all three sectors.
The prudent investor will note:
1. Commercial property has historically been a lot less profitable than residential property. Between 1980 and 2013 residential property, according to, returned four times as much as commercial property.
2. Data on commercial property returns assume that gross yields are all reinvested. This exaggerates the possible returns, as it ignores the cost of managing and maintaining commercial properties.
3. The pressure on retail businesses from the internet adversely affects rental yields. Internet retailers require very little space, and as the margins of traditional retailers are threatened, they spend less on their properties. However, according to IPD, retail property has performed better than offices but worse than industrial over the last 33 years. 

 UK Commercial Property Trust PLC


Junction 47 Leeds, from
UK Commercial Property Trust PLC (UKCM) floated on the stock market in September 2006, a year before the collapse in commercial property prices. UKCM invests in 41 properties, with the largest, the Junction 47 Leeds retail park, representing 5.9% of its value.
Sector weightings are as follows (from the 2013 annual report):
% of portfolio
Property - Retail
Property - Office
Property - Industrials
Property - Shopping Centre
Net Current Assets
All UKCM's properties are located in the UK and they are spread around the country. The property portfolio has been managed since launch by Ignis Investment Services, a subsidiary of Standard Life PLC. The company has a market capitalisation of 1 billion pounds, trades on a 4.5% premium to net asset value and yields 4.5%.
The directors' decision to limit the trust's debt helped it to weather the financial crisis much better than the majority of its peers. UKCM's share price (in red) has declined far less than iShares UK Property ETF (in blue) that I have used as a benchmark.
      Chart courtesy Yahoo, click to enlarge.
UKCM offers the investor a fairly secure route into the commercial property market. Consider:
1.       Net debt is just 17% of net assets, which UKCM claims is the lowest gearing in the sector. Loans are long term and their weighted cost is 3.85%. As Standard Life Investments owns 55% of the trust, it should ensure that this conservative approach to financing continues.
2.       The property portfolio is well diversified, both by sector and by region, though the concentration on wealthier parts of the UK means that Southern England has a much larger weighting than elsewhere.
3.       Vacancy rates of 3.7% are low by the standards of the sector and 99% of rents are received within 28 days of becoming due.
4.       The directors decided in 2014 that the dividend should be covered by net rental earnings. As a result, they reduced the dividend for 2014, but the shares still yield a healthy 4.5%.
5.       Revenue earnings per share have been stable over the past five years. Total costs, which include a 0.65% management fee, amount to 1.8% of the trust's total assets.
6.       The NAV per share reported as of June, was 7% higher than December and UKCM expects it to be higher again at the year-end.
The main valuation tool for property companies is to compare the share price to the underlying net asset value. Currently, UKCM trades on a 4.5% premium to net asset value, which is about average for the past five years:
                                     Chart courtesy Investors Chronicle, click to enlarge.
It is likely that the NAV per share of 78p in June will soon reach the current share price of 81.5p.
Both the directors and the managing agents are unreservedly optimistic about the future of UKCM's business. Two directors have backed this judgment by buying shares at 76p in February and 81p in August.
Nevertheless, prospective investors will note:
·         Rising rents and commercial property prices depend on a continuing recovery of the UK economy.
·         Investors are attracted to commercial property for its steady income. An increase in yields in other asset classes could depress the value of property company shares. And UKCM's premium could disappear or turn to a discount, as it did in late 2011.
·         Property companies provide limited diversification from other equities. A study by Rick Ferri in the US suggest that the correlation between Real Estate Investment Trusts and the stock market has been inconsistent over the last 32 years. At times it approaches one and at times it approaches zero.
Disclosure: I hold a long position in UKCM.