Pension funds appear to be receiving mixed messages about whether or not they should invest in commercial property, following recent statements from consultants and fund managers on the asset class.

Lane Clark & Peacock (LCP), for example, is encouraging institutional investors to return to the asset class. According to LCP, commercial property yields now stand at just under eight per cent compared to four per cent in June 2007, when they were lower than gilts. A greater risk appetite from investors following increasing optimism about the economic recovery and restored interest from overseas have also added to the attractiveness of commercial property, it says.

"It's very interesting to see the dramatic changes that have taken place over a relatively short period of time," said Ken Willis, partner and head of LCP Corporate Investment Consulting. "While property was a definite no-go area for pension fund investment in March, it is now yielding compelling returns and is a very attractive asset class.

However, HSBC Global Asset Management has warned pension funds that the current recovery in commercial property may be short-lived because it has not been driven by fundamentals. Institutional investors are being urged to remain cautious because, as Guy Morrell, head of HSBC Multimanager (UK), and manager of the HSBC Open Global Property Fund, points out, it is at risk of being the "wrong sort" of recovery.

August 2009 saw the first increase in capital values for more than two years, but Morrell added that with an illiquid asset class such as commercial property it is important to understand the drivers of performance.

Morrell said: "Given the lagged impact of the underlying economy on property occupier decisions, we can expect conditions in the occupier markets to weaken for some time," and thus it is not rental values driving the recent rise, but rather the record gap between cash and property yield.

"The danger, therefore, is that increased demand for investment property drives prices up too quickly and renders the market unattractively priced once again. If so, it will be the wrong sort of recovery in the sense that it will be unsustainable and would leave the market vulnerable for a further decline."

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