the majority of private client managers expect that commercial property will deliver returns of between 5-10% per annum over the next five years and will continue to include this asset class within client portfolios in a bid to achieve both total returns and diversification benefits.

The latest Wealth Inquiry conducted by Incisive Research investigates commercial property. The survey, which surveys 40 wealth advisers shows that almost 46% of advisers believe it is appropriate to hold between 5-10% of a client's portfolio in this asset class. However, some (29%) were even more enthusiastic, saying that more than 10% was an appropriate figure (see figure 1).

Tim Cockerill, head of research at private client managers Rowan & Co, says 5-10% seems to be the default allocation toward property. A standard portfolio allocation is generally 50-60% in equities, 5-10% in bonds, and the remainder in fixed interest.

"However an appropriate allocation to property depends upon the risk profile. For those who allocate more than 10% of a portfolio toward property, they are likely to have lower risk investors in mind," he says.

Iain Keys, head of real estate investments at London & Capital, is more enthusiastic. He says more than 10% is appropriate due to the diversification benefits in the current market environment.

But current levels of exposure are set to increase. Of private client managers surveyed, 59% anticipated that the level of property exposure within a private client portfolio would rise in coming years. (see figure 2).

Keys agrees that exposure to property will drastically increase but says investors will look beyond the UK. Increasingly, investors are looking to overseas markets to complement their property exposure.

"The German and eastern European markets had been particularly popular and have strong growth potential," he says.

"In the past, one of the arguments against investing in property was illiquidity. This is less so the case nowadays. Investment via funds means that it is much easier to redeem assets nowadays." He adds that the weight of money going into property is also helping to increase liquidity.

Meanwhile, 58% of respondents indicated that clients were "marginally" more interested in commercial property nowadays, while 29% said their clients were "significantly" more interested. (see figure 3).

Cockerill says: "These figures reinforce the fact that commercial property has been a relatively unknown asset class in the past, but now its profile is starting to be raised due to the availability of new products and good past performance," he says.

"Although returns have been strong, this has not been the most glamorous sector which would explain why there is not a significant increase in interest. While investors are getting excited over the strong returns from areas such as emerging markets, this is unlikely to happen in terms of property."

Figures to the end of 2005 show that property has outperformed gilts over one, three, five and 10 years, and equities over three five and 10 years. Over 10 years, property (the IPD index), has delivered annualised returns of 12.5%, compared to the FTSE All Share of 7.6% and 5-15 year gilt of 7.7%.

Despite excellent past performance, few expect stunning performance from property in the years ahead. The majority (65%), anticipated returns of between 5-10% pa in the next five years. Interestingly, none expected negative returns from this asset class. (See figure 10).

Cockerill says: "The majority forecast of 5-10% is a sensible level of return to expect. This is an acceptable return given the low risk nature of property."

Keys believes returns will be higher than 10% pa, overall, but expects overseas markets will deliver stronger returns than that of the UK.

But it is not just about the potential returns that encourage private client managers to invest in property. In fact, less than 5% said that achieving total returns was the key reason behind holding this asset class.

Rather, diversification certainly had a key role to play. More than 9% said their main objective was to diversify while an overwhelming 77% said they held property for both total returns and diversification benefits (see figure 4).

Surprisingly, no survey respondents chose yield as their primary reason for investing in property. Cockerill says: "If building an income portfolio, the three main types of investment are equity income, bonds and property as these deliver yield. Certainly, one of the benefits of investing in property is the security of yield."

Open ended funds were touted as the best way to access commercial property on behalf of clients, with more than 54% opting for this route. Closed ended funds and direct property were an equal second, at 18%. Investing in the shares of listed property companies was seen as the least popular route at 9%, possibly because property shares do not offer the same diversification benefits away from equities as physical bricks and mortar. (see figure 5). In terms of preferred domicile, there was little differentiation between onshore and offshore funds (see figure 6).

Cockerill says: "Open ended funds are a logical route for most. Close ended are as good, but are not as straightforward or as simple to understand. One drawback with close ended funds currently is that they are trading at a premium to their market rates, but that is driven by the yields."

Keys favours open ended funds, particularly for their liquidity and the fact they are easier to understand. He prefers they are based offshore to gain the taxation advantages. "Buying individual direct properties, one at a time, takes a while to build up and therefore it is difficult to gain the diversification benefits. Clearly this format is not as liquid. Meanwhile, shares in property companies do not offer the diversification benefits and they can often trade above par. We feel the best route is open ended funds," he says.

Meanwhile, there is a lukewarm response to the introduction of Reits (Real Estate Investment Trusts), which is on the agenda for 2007. Only 30% of respondents said they are likely to use these products. Around 26% said they already use similar offshore products and 34% said they were unsure. (see figure 7).

Another recent development on the property scene is the launch of several global securities funds. Groups to launch funds of this ilk in recent years include Schroders, Sarasin, Fidelity, Standard Life Investments, and Skandia.

But most private client managers are yet to do their due diligence on this new breed of fund. Figure 8 shows that 45% of respondents said they were yet to research these funds and make a decision.

Of those that have done their due diligence, the consensus is that global securities funds will not replace the more traditional property funds which contain bricks and mortar. The survey showed that 40.91% would recommend these to sit alongside UK property funds (see figure 9).

For those private client managers choosing a property fund, the nature of the underlying asset class was by far the most important aspect, followed closely by the performance record of the fund managers. The least important consideration for managers, however, was the domicile of the fund.

Keys says: "It is the underlying asset class that will drive returns, so this is the most important. However, other factors cannot be ignored, for example the structure of the fund, in terms of its fees, exit ability, liquidity and tax are all important and will influence returns." wealth