Putting money into bricks and mortar is still a valuable diversification Published on Saturday 12 May 2012 17:49 WHEN the bottom fell out of the commercial property market in 2008, millions of ordinary investors found themselves trapped in bricks and mortar funds that blocked them from taking their money out. Like the residential housing sector, the commercial property market came down to earth with a bump during the financial crisis after several years of rapid growth. In 2008 commercial property prices plunged by 44 per cent, dragged down by the subprime mortgage crisis and the subsequent shockwaves that rippled through the global economy. There has been a recovery of sorts, but commercial property prices remain some 25 per cent below their 2007 peak. Stability has been relative, with market volatility and continued global economic uncertainty undermining confidence in the sector and investors seeking alternative safe havens. Yet funds that invest in bricks and mortar - such as shops, offices, warehouses and other industrial buildings - still have a big role to play, not least for investors looking for a level of income no longer available from cash savings. Commercial property funds give investors a source of income that, crucially, has a relatively low correlation with other assets, such as equities and bonds. That's why many experts believe bricks and mortar should always figure somewhere in the typical investor's plans. But that crash in 2008 sent investors scurrying for cover, with many were stranded as commercial property funds put a block on withdrawals, and many remain wary of them. Scottish Widows, Aegon, Standard Life, Norwich Union (now Aviva) and Axa were among the big names to close the doors on their commercial property funds in 2008 and 2009 to stop a flow of withdrawals that had begun to pose a risk to their liquidity. Most later reopened their doors and while they may have been justified in putting a block on withdrawals, investor confidence was rocked. But is it now time for the average investor or pension saver to reconsider bricks and mortar? It might depend on your expectations. If you're hoping for the double-digit returns of the mid-noughties boom years, for example, you're going to be disappointed. That was an aberration. Commercial property is best used by investors to provide income and some diversification. Andrew Hannay, director of Edinburgh-based IFA Robson Macintosh, said: "Notwithstanding the normal consideration when investing in any type of property, we continue to support this asset class believing that it is worthy of inclusion. Property values are always up and down and our view is that it offers better value now than at the peak of the market in 2008. The main advantages of commercial property funds are the income they pay, according to Hannay, followed by the chance of some capital growth and the diversification they offer. And a number of the funds are paying out a decent level of income at a time of huge demand for regular payouts. Most yield between 2.5 and 4.5 per cent, with a handful paying out more than that. The Schroders Global Property Income Maximiser fund currently yields 6.7 per cent, while the Aviva Property pays 5.3 per cent. If you're more interested in capital growth the story is less compelling, despite a recent recovery of sorts. "Investing in real, tangible assets like property has obvious appeal for many investors, but high ownership costs and ongoing management do however constrain returns," noted Barry O'Neill, investment director at Carbon Financial Partners. The average fund in the Investment Management Association's property sector is down 1.3 per cent over the last year but up by 35 per cent over the last three, according to Financial Express data. Property investment trusts have delivered more impressive returns over the last three years, though the less successful among them have suffered significant losses. The Standard Life Investments Property Income Trust is up 83 per cent over three years, with five other trusts posting returns above 50 per cent over that time frame. At the other end of the scale, however, the Invesco Property Income Trust is down a massive 72 per cent, Financial Express figures show. And the potential problem of finding your money locked into a fund hasn't gone away. Investors may still face new restrictions on cash withdrawals if the commercial property funds run into difficulties. There are currently no "deferred"periods for withdrawals from the big "bricks and mortar" property funds, but managers reserve the right to impose them whenever they need. O'Neill said: "The ability of the providers to apply such restrictions at any time on property funds remains so always be cognisant of this potential lack of liquidity. Generally no warning is given to investors. For ordinary investors the key to getting the best out of commercial property is to invest in two or three funds that focus on good geographic areas and offer a mix of office, retail, warehousing and university accommodation, said Hannay. He favours the property funds run by M&G, Henderson, Scottish Widows and F&C. "Like any good investment though it should never be an "all or nothing" position. It is a good medium- to long-term investment within a diversified portfolio," he said. For many it will provide a more tangible alternative to funds with a similar risk profile such as the many fixed income funds on the market.