I last wrote in detail about commercial property as an asset class in 2009. In the aftermath of the financial crisis, half-finished towers and moribund building sites dotted London like the LEGO play of a child interrupted.

The towel had been thrown in. I saw an opportunity.

Over the next few years, property investments – stock market-listed Real Estate Investment Trusts (REITs) as well as old-style property investment trusts and funds – did better than anyone expected.

Helped by persistently low interest rates, property assets doubled or even tripled your money over the next few years, thanks to rising prices and generous yields. Skyscrapers soared.

Some property shares lagged the recovery, giving a chance to buy again in 2011 – especially as the recovery was slower to reach small cap property firms

However certain parts of the sector are now well down from those highs.

Industrial property companies are doing well thanks to the weak pound juicing manufacturing, and there’s a boom in the warehouses that support online shopping and other logistical operations.

But companies that own lot of office space in London trade at big discounts to their net asset value – due mostly, I think, to the ongoing Brexit fiasco.

The market also seems wary of second-tier retail exposure. That’s understandable in light of the many store and restaurant closures we’ve seen since we voted to shoot ourselves in the foot in 2016.

Bailing on Brexit

Long-time readers will know I think Brexit is our biggest unforced error since the Hundred Years War.

However everything has its price.

If I can buy prime London office space at 70p in the pound via the stock market, I have a good margin of safety. If property developers have curbed speculative ventures because they fear bankers will decamp to Frankfurt and start-ups to Lisbon, at least new supply will be limited. That should help the incumbents.

Also, I don’t think we’ve condemned ourselves to penury with Brexit. I just believe we’ll be poorer than we would have been, for the foreseeable decades to come, for little gain. (That’s bad enough!)

Jeremy Corbyn notwithstanding, the rich will still get richer, and London will remain the base of operations for most of them.

You can shake your fist from the provinces, but you can’t make an oligarch or a tech entrepreneur move their company to the middle of nowhere. (Movers and shakers are even more aghast at that idea in light of the social divisions revealed by Brexit.)

But before anyone sells their Facebook shares and plows it all into UK real estate, know three things.

Firstly, Monevator is not about share tips. At most, posts like this are just suggestions of areas worth exploring. Do your own research – and on your head be the results.

Secondly, you should know I’ve had this view about commercial property since quite soon after the Brexit vote, when traders dumped UK property faster than Boris Johnson shedding his principles.

As global money began fleeing UK PLC, property funds had to be gated so investors didn’t ask to withdraw money that the funds didn’t have. I thought this was a sign the panic was overdone, and flagged up the potential opportunity.

Since then some companies I mentioned have done okay, but others have fallen further.

Again, do your own research – because you will have to live with the consequences.

This time it’s different

The third thing to note is that back in 2009, property prices really had plunged.

If you wanted to go out and buy a London office following the financial crisis, it was cheaper than a few years before. Same with a new lease, too. Prime property was going cheap.

The falls in property investments on the stock market then reflected this gloomy reality.

That’s the standard cycle in commercial property. Boom years – in which money is easy to find and development rampant – followed by lean years where over-extended developers go bust.

Sell when the fat blokes in suits and hard hats in the business pages look smug and contented, that’s my rule of thumb. Consider buying when those CEOs have been shuffled away for wiry upstarts who appear in the same pages talking up the forgotten sector again.

This time – so far – it’s different.

London office space is holding its value, and rents remain high, too. Brexit fear has not yet dinged the hard bricks and mortar assets themselves, just their stock market proxies.

Those discounts to net asset value we see with certain REITs may reflect an irrational disconnect with reality on the ground. Perhaps some of the beefy property blokes will be proved right to be more confident about Brexit than the flighty liberal elite fund managers selling down REITs?

Alternatively – more technically – it may be that hedge funds and the like who are very pessimistic about Brexit have turned to shorting the shares of listed property giants as an easy way to express that view. (The funds are unlikely to own physical offices to dump).

Does this make the big London office REITs more of an opportunity this time – because it’s a phony war – or less so – because the usual cycle hasn’t yet played out from peak-to-trough?

It’s something to think about.

Commercial property and your portfolio

In my next post I’ll recap the broader investment case for commercial property, whether you’re an active or a passive investor.

Why do some model portfolios include specific commercial property exposure, and how does the asset class differ from equities and bonds? What if you already own your own home?

The exciting bit is over, but the important stuff is to come. Subscribe to catch it.

Disclosure: I have various beneficial interests related to London property.

What caught my eye this week.

Royal Wedding day, and this week’s money and investing links will flutter by you like confetti in the wind. Before becoming confetti stuck between your teeth. After becoming confetti that snagged in your hair. And then becoming confetti that falls into your glass of bubbly before the speeches.

Or is that just me?

I like confetti at a wedding as much as the next temporary hedonist – when it’s spiraling through the air and framing the happy couple and everyone inhabits in a Disney movie for an instant, or at the very least an episode of Emmerdale.

But then the confetti falls to the ground. The newlyweds go off on honeymoon to argue about whether they should get out of bed to eat the complementary breakfast they’ve already paid for. And the guests go home to nurse their credit card bills.

Weddings are great fun. But unless you’re rich, they’re too often an extravagance.

Even if a parent is paying, that’s money they might have given you instead to go towards a home – or to invest in a pension for those long distant post-youthful years when you’ll really need a party.

I’ve been to several weddings where I’ve guiltily winced at what it cost because I knew they couldn’t afford it. Not in the sense of they wouldn’t pay the bills and we’d all end up in the kitchen doing dishes in our suits and frocks. Just that it’d be a five-figure sum dogging them for years to come.

According to the BBC, today’s event will boast 600 guests, with another 200 coming along to the evening bash. The Financial Times puts the cost at around £32m, which seems low, especially as it reckons £30m of that will go on security.

I liked the sound of Claer Barrett’s £10,000 affair, recounted in the FT [search result]:

“I would have got the number 26 bus to the wedding, but my dad insisted on a taxi.”

I’ve also given some tips on a better value wedding in the past.

True, I’ve never gotten married (and not only because I’m too tight) but the perspective of someone who has been a guest at a couple of dozen weddings could be useful if you’re trying to save a few quid.

Not a churlish guest, I stress – as I say I love weddings.

At the very least the music today will be amazing, even if you’re no royalist. The money is spent, so let’s enjoy it. And I wish Harry and Meghan the best of luck in a life you couldn’t pay me £30m to take on.

Did you get married on the cheap – or blow the budget? Was it worth it? Could you have done anything cheaper, in retrospect?

Let us all know in the comments below.

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Many months ago, I promised to look at the practicalities of using income-seeking ETFs to generate an income in retirement.

It seemed sensible to split the post into two parts:

• The first, already published, looked at purely passive income-seeking ETFs.

• A second post – this present one – looking at so-called Smart Beta income-seeking ETFs.

That said, as I’ve remarked before I’m not necessarily a fan of ‘smart’ income-seeking ETFs. Countless investors had their fingers burned investing in the popular iShares’ FTSE UK Dividend Plus ETF (Ticker: IUKD) ten years ago, having mistakenly seen it as a lower-cost and less-risky way of getting an income from higher-yielding shares.

I’ve also revised the intention of this post. As I was writing it, I increasingly saw less point in trying to construct an example portfolio, as I did with those purely passive ETFs.

There are so many choices to make – many of them very personal – and the chosen Smart Beta methodology plays a critical role. My own selection would arguably be arbitrary compared to yours.

Rear view mirror

Smart ETFs aren’t smart in the sense that a real-life manager of a fund or investment trust might be. There’s no judgement at work, or years of investment experience.

Instead, a theoretical index is constructed containing shares that meet specified criteria – criteria that for the purposes of this post would supposedly correlate with high, robust, and reliable levels of income.

By definition, then, these smart income approaches necessarily look backwards. They extrapolate into the future a set of dividend-paying characteristics that have been observed in the past.

And the past, as the financial services industry is duty bound to remind us, is not a reliable indication of what may happen in the future.

The consistent growth approach

A number of ETF providers offer ETFs that aim to track S&P’s family of Dividend Aristocrat indices. These contain shares with a history of increasing their dividend payments for 25 consecutive years or more, subject to a (large-ish) minimum market capitalisation. The final decision on inclusion is made by a committee.

On the face of things, this is a reasonable approach. Not least because a consistently growing dividend may speak to substantial free cash flow, which is always a good thing.

But as an income investor, I know all too well that there is no guarantee that a company that has grown its dividend for 25 years or more will continue to do so. Or indeed, that it will continue to pay dividends at all.

Consider Tesco, for instance. The grocery giant abruptly cut its dividend by 75% in August 2014, and abandoned paying it altogether in January 2015 — and it, too, had that golden 25 year reputation.

More recently, America’s gigantic GE—a member of the Dividend Aristocrat index for 35 years—was booted out after incoming chief executive John Flannery cut the dividend. Pfizer offended similarly.

Perhaps more fundamentally, the Dividend Aristocrat approach excludes any consideration of yield. As an income investor, I want consistency, but I also want income.

Granted, the Dividend Aristocrat approach has been shown to deliver superior overall returns, but at the end of the day, we’re talking income here.

The higher-yielding approach

An alternative approach goes gung-ho for income, building indices of higher-yielding shares.

Vanguard’s High Dividend Yield ETF, for instance, tracks the FTSE Russell’s matching FTSE All-World High Dividend Yield Index. MSCI also has its own High Dividend Yield Index, while Dow Jones maintains a series of Select Dividend indices.

iShares ETFs often (but not exclusively) use the Select Dividend series, while providers such as WisdomTree and Amundi often use the MCSI indices.

STOXX and Société Générale maintain their own flavours, the latter under the Quality Income index. These are less widely available than the majors – and when ETF market capitalisation has a bearing on charges, that can be a disadvantage.

• To see the wide range of dividend-touting ETFs available, check out this list from the JustETF tool. We only cover a taster of what’s out there in this article. Be sure to research exactly what you’re buying if you choose to invest!

Methodologies vary. FTSE Russell’s approach is to capture the highest-yielding 50% of the market, ranked by forecast yield, for instance. Others are pickier: STOXX wants to see positive dividend growth over five years, and a dividend payment in four of the last five years, while Société Générale adds nine ‘quality factors’ to the mix, including profitability and solvency.

So how to pick an ETF constructed on ‘higher yielding’ basis? My suggestion would be to start with the index methodology, and choose the one with which you are most comfortable. Which comes closest to your own stock-picking approach, or seems the most sensible?

Don’t be surprised if that leads to some awkward decisions. The iShares STOXX Global Select Dividend 100 ETF (Ticker: ISPA), for instance, seems only to be available on the German bourse with some brokers, while hunting for Lyxor’s SG Global Quality Income ETF at your broker may take you to Paris (although it is available on the LSE under the ticker SGQP). From a ‘smart’ perspective, both of these seem to me to be ‘smarter’ than ETFs based (say) on the more simplistic FTSE Russell approach.

But if you look to buy on costs – as many people do with ETFs – then Vanguard’s FTSE Russell-based ETFs are undeniably considerably cheaper than Lyxor’s SG Global Quality Income and iShares’ STOXX offerings.

What would I do?

On the one hand, you have fairly sophisticated products based around Société Générale’s Quality Income index methodology, and on the other you have the broad simplification of the FTSE Russell approach. Both have their merits.

Which is best? There isn’t a simple answer.

On the whole, I remain to be convinced of the worth of smart income-focused ETFs – compared to say income investment trusts.

None of these Smart Beta products feature in my own portfolios, nor are likely to.

But if I were to seek to build a retirement income from such a set, I’d want to spread my risks by opting for multiple providers, and multiple methodologies. Nor would I buy solely on cost – diversification has a price, and it’s probably one worth paying.

Why the emphasis on diversification? Simple: to try to minimise the downsides of ETF algorithms blowing up, à la IUKD.

Finally, I know that I’ve been away from the site for many, many months. Sorry about that: sometimes, real life gets in the way.

But I know – from the nudges I’ve had from The Investor – that at least a few of you have missed me. It’s good to be back.

You can catch up on all Greybeard’s previous posts about deaccumulation and retirement.