09 February 2006

Property funds in ISA's

Anyone looking to overload this year's ISA investment with property funds should think again, investment analysts have warned.

With yields falling and equity markets remaining buoyant, investors are being advised to keep only trace elements of property in their ISA portfolio.

The recommendation comes despite the fact that property funds qualify for ISA investment for the very first time this tax year.

Meera Patel, senior investment analyst at IFA Hargreaves Lansdown, said investors were attracted by the lack of correlation between property and equity markets but insisted falling returns simply could not justify any great confidence in this asset class.

For the last few years, we have been extremely cautious of commercial property,'' she told Reuters. ''Properties should usually be bought for their yields and these have fallen over the years. The capital growth from these is also usually very small so there is not much of a selling point there.'' Patel argued that if total returns were to be in the region of 6 per cent this year, a figure widely forecast, then this made property look expensive and equities appear much better value in the current environment.

She pointed to an uncertain economic picture as another reason for investors to be shy of property funds.

''If buildings become vacant as companies are forced to downsize, this could lead to a further fall in rental yields and property values overall.'' Patel concluded: ''We believe that investors should have no more than 10 per cent in property as part of their overall portfolio, given the outlook for the sector, and I wouldn't be surprised if investors currently actually had far more than this.'' Melvyn Bell, investment manager at Newcastle IFA Lowes Financial Management, echoed Patel's concerns over high weightings of property funds in investment portfolios.

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