At a time when bond prices are falling and could fall much further, charities might feel they need to look at other asset classes. Many consider property to be halfway between bonds and equities and feel that it provides a high level of income while also looking like good value in the short term.
One option is to invest in common funds specifically set up for charities that invest in commercial property and yield between 5 per cent and 8 per cent. The alternative is to invest in real-estate investment trusts, which offer income returns at the lower end of that range. The common investment funds can usually be dealt with monthly or quarterly, the real-estate trusts daily through the stock exchange.
In both cases, because the income flows are based on rental income, they should rise over time. Most UK property is sold with upward-only rent reviews; this has meant that property has tended to provide good protection against inflation. In practice, it is easier to push up rent when demand for property is rising, so the recent pick-up in the UK economy augurs well for rental levels.
The other influence on prices is supply. For much of the past five years, this has been limited by high build costs, a depressed UK economy and the knowledge that banks hold a lot of highly indebted property on their books that was built during the last boom.
This means that although some property will come back on to the market, supply has been fairly limited, so rising demand should lead to higher capital prices.
Since June 2008, total returns have been 50 per cent on long-dated government bonds, 35 per cent on UK shares and 9 per cent on commercial property, as highlighted by the Investment Property Database index.
However, there is a possibility that property could look better value in the future. Bonds might have got ahead of themselves and some charities might fear that equities can be quite volatile.
In light of these issues, commercial property is potentially an attractive alternative. Looking back at results over the past few years, it is clear that property has lagged behind other asset classes.
The weakness in the IPD index since the autumn of 2011 seems to have dissipated and we are now expecting capital values to be higher rather than lower in 12 months time. While London has clearly benefited from overseas purchases, we think that these purchasers now tend to buy outside London and that other investors are returning to the commercial property market.
This has been reflected in the discount on many property investment trusts disappearing, meaning that charities will have to tread more carefully in this area. However, property common investment funds could be seen to provide a good bridge to safer shores for charities, and to a useful level of income.
John Hildebrand, an investment manager at Investec Wealth & Investment