Back in February I was asked about commercial property and if I would buy it and I said no.

The reason for that was because I believed that REITs would outperform them.

A REIT (real estate investment trust) in very simple terms buys real estate. Its main advantage (or disadvantage) is that it is effectively a share and that share can trade at a discount to the asset it holds.

For example, the REIT buys property that is worth for example, after all the market falls, £10m.

If there were 10 million shares you would expect each share to be worth £1. That would make sense? However in difficult markets REITs trade at a discount to their actual net asset value, so you can effectively buy exposure to the aforementioned property at quite a discount to its real value at that time.

When the market turns positive the REIT can then change and trade at a premium. The primary reason for this is that they expect the next valuation of the assets to be upward.

In July some of these REITs were trading at large discounts to their net asset value with Hammerson at 42%, British Land at 43%, Brixton estates at 51%, Segro at 42%. Had you bought this share in July when I wrote the column it was worth 279p. It is worth 449p this morning – a cool 61% return. (1) Whilst REITS still have further to go because of the benefit of their gearing (borrowing within them to invest more), and in anticipation of the next valuation point where all their assets will be re-valued, the actual commercial property asset itself is now beginning to look good. A sure sign of the bottom of the property market is lots of for sale signs, but with a few noticeable exceptions this has not happened this time.

So why, after five years of advising against commercial property do I believe the commercial property asset is a worthwhile investment.

Firstly, commercial property is now a target for overseas investors and in particular pension funds who are focusing on the inflationary protection that commercial property will offer.

Armageddon was expected, and priced into the market, but that has not happened, and no-one now expects it to happen, so with depressed capital values the yield/income has been driven up.

Many rents in the city have upward only rent reviews and this is attracting the large sovereign wealth funds keen to make a yield. Income is everything, especially if it has inflationary protection which commercial property income benefits from.

What has caught the market by surprise is the fact that banks have not had to sell their properties and have retained them. The lack of supply to the market has kept prices buoyant whilst demand has soared. Whilst much of this has occurred in London, it’s a matter of time before it ripples out to other key areas.

From their current oversold position, commercial property is expected to rise by around 15-20% over the next six months.

In the city today there are 30 banks that are now keen to lend. Interestingly most are foreign banks and 13 are German. The overseas investor is buying UK assets at quite a discount because of the currency exchange rate and this is driving up demand for the commercial asset.

Many of the larger REITs such as Helical Bar, London and Stamford have been very buoyant and raised sizeable cash positions which are now looking to take advantage of any weaknesses. Most of these will also have hedged (protected) any threats of interest rate rises on their debts so that threat when higher inflation returns will be excluded.

Savill's announced that city Demand is now at a parallel with January ’08. The general belief is that demand will continue for the next 24 months whilst overseas money continues to pour into London. 85% of all transactions in London are from overseas investors. Sounds favourable. (2) Source: (1)Yahoo finance (2) JLL EMEA For investment advice call Peter on 0845 230 9876, e-mail