Should you buy into commercial property via an Isa?

Should you buy into commercial property via an Isa?

Billions of pounds are expected to flood into new-style Isas this year, taking advantage of a recent rule change which allows direct investment into commercial property. But after a decade of explosive growth, is now a good time to buy a property fund?

"I wouldn't touch one with a bargepole," says Mark Dampier, investment director of financial advisers Hargreaves Lansdown. And, amid product launches by Legal & General and Norwich Union, he adds: "Ten years ago, commercial property funds were unfashionable and unloved. That was the time to buy, not now."

Over the past 10 years, returns from commercial property have outpaced both equities and bonds - and have done so on a much steadier basis. Norwich Union's giant property fund - it's now £2.25bn in size - has trotted out returns of 12%-18% over the past four years, and even in the depth of the stock market crash in 2001-02 was still turning out positive returns.

Now Norwich Union is making the fund available to put into Isas. Director of investment Neil Davies says: "Commercial property, with its strong asset backing, has plenty to commend it. It can deliver an attractive and steady income stream from rents with the potential of capital growth. Its relatively low volatility and lack of correlation with other assets make property's inclusion in an Isa an exciting opportunity."

But Mr Dampier wonders why so many groups are pushing property as an Isa investment when the tax benefits.....continued below

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are likely to be minimal.

Isas are not as worthwhile from the tax point of view as they once were. The phasing out of tax credits on dividends for equity Isas means that if you are a basic rate taxpayer, the only benefit with a shares Isa is not facing a capital gains tax bill.

"Why would you want to use your Isa allowance investing in property? The income will be taxed, yet the underlying reason for investing in commercial property is for the rental income yield."

He also worries about liquidity issues. "Has everybody forgotten what happened to funds such as Target Prime Residential? Back in the early 90s they completely tanked and you couldn't get your money out. People forget about how illiquid commercial property can be. You can't just sell a shopping centre in a matter of days because people want to cash in their investment."

If you are keen to invest in commercial property, Mr Dampier recommends global property funds such as the one recently launched by Fidelity. It invests in shares in commercial property companies and Real Estate Investment Trusts, which means your money can be spread across thousands of properties around the world - from prison blocks in America to shopping malls in Japan.

p.collinson@guardian.co.uk

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