The UK Economy - a Pensions Perspective

Articles from the Trigon Pensions team

Trigon Pensions Limited was formed in March 1988 by an established team of experienced pension consultants with the aim of providing expertise in all aspects of pension scheme design and operation, in a friendly and professional manner.

Trigon Pensions Limited has established a broad base of corporate clients throughout the UK, providing a range of professional Pension services such as scheme administration and corporate pensions consultancy for companies with between 100 and 1,500 active members.

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Jill Brown and team at Trigon Pensions comment on Pensions investments and the Commercial Property outlook

After a number of years of strong performance, the UK commercial real estate market collapsed in the second half of 2007 and capital values continued to reduce sharply throughout 2008. This downward trend has now continued into 2009 with capital value’s reducing in total by around 36% since the latter part of 2007.

Jill Brown and the team at Trigon Pensions outline how it is widely expected that commercial property will continue to fall perhaps even a further 5% to 10% before levelling out. Many fund managers are predicting that 2009 as a whole will be a further negative year. It is expected that the market will then recover in 2010 to produce either neutral or even a small positive return, with positive returns of 7-8% per annum thereafter.

In the early part of this decade, property was the top performing asset class by comparison to equities, gilts and cash. Despite the decline in values seen over the last couple of years we believe that property values will increase once more, however, returns are likely to be more modest than double-digit returns achieved previously.

Looking ahead, Jill Brown anticipates that rents, in the short term, will be stable or even downward if we enter a period of deflation. In the longer term rents will continue to increase broadly in line with inflation. If allowances are made for depreciation and the expenditure required to maintain property, net income growth of between 1 and 1.5% still looks likely. With income returns of 6% per annum, this will result in a long-term total return of something in the order of 7 to 7.5 % per annum.

In the shorter term the rental outlook is weaker than it has been for some time. This is particularly true in the retail and industrial sectors, although other parts of the market (offices) are continuing to see marginal rental growth.

However, property rental incomes are usually protected by upward only reviews and the level of rents being paid to fund managers is usually significantly above the level of market rent. However, due to entering a serious recession and with a number of casualties to date, this could lead to a small rental growth and falling income in the short term.

In summary, the current yield basis of property looks attractive. An estimated 7% per annum return for property investors in the long term, should outperform gilts and fixed interest assets. On the back of continued strong demand and continued rental growth prospects, property returns are likely to be around 7-8% per annum in the long term on an ongoing basis.

Trigon Pensions shorter-term view is that we are likely to experience further downturns in property before the market recovers during the course of 2010.

The team believe that even at current valuations, property investment is once again beginning to look an attractive asset class for pension fund investment. However, Trustees need to ensure that they are confident that the market has levelled out sufficiently before any investment should take place.

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© 2009 Trigon Pensions Ltd