Taylor Scott International News
23 September 2013 | By Jon Yarker Speculation that UK commercial property could prove to be the investment standout of 2013 is gaining momentum as investors return to UK property funds. Many investors had their fingers burnt with commercial property when the financial crisis broke. The average fund in the IMA Property sector, for example, dropped by 50 per cent between the peak at the start of 2007 and its trough two years later. However, the sector has shown signs of recovery and is currently almost 70 per cent up from its 2009 trough. Meanwhile, investors seem to be more interested in the space, with the IMA Propery being the fifth bestselling sector in August with net retail sales of £140m – the highest since July 2010. F&C UK Property fund manager Guy Glover suggested earlier in the year that commercial property could be one of the best-performing asset class of 2013 after considering where its fundamentals are relative to other asset classes. Investors’ search for income, when combined with the relatively low valuations within commercial property, which are still around 35 per cent below their pre-crisis levels, could see the asset class garner more interest in the months ahead, he argues. “At the time [of my prediction], 10-year gilts were delivering 2 per cent and property income return was coming through at 6.5 per cent,” Glover says. “You’re looking at corporate bonds at 4 per cent, equities with a 3 per cent yield and you see commercial property is double or treble some of other asset classes and people are out there screaming for income.” Data has been improving with the IPD UK Monthly Property Index showing commercial property made total return of 0.9 per cent in August – contributing to a total increase of 5.5 per cent over 12 months. Recently Henderson head of multi-asset Bill McQuaker has bulked up his exposure to property – increasing this to 9.4 per cent in the group’s Core 3 and Core 4 portfolios. Accessing the asset class through the £1bn Henderson UK Property fund and the £864m Legal & General UK Property trust, McQuaker says: “I believe by the close of 2013 commercial property will have been one of the more positive and fresh stories of the year. “It is providing a decent income stream and some inflation protection, with the average fund yielding circa 6 per cent according the IPD. We are not anticipating really strong performance in capital growth terms but it does have the potential to make some gains.” Legal & General Property director of research Rob Martin shares in the improving sentiment around UK property and is optimistic this will continue. Martin says: “Economic data has been surprising on the upside and forecasters have upgraded growth expectations. “One of the drivers is the gap between yield on real estate and funding from banks. There is now more credit available from lenders. The US market has become quite competitive from a loan perspective. This has meant substantial changes to loans in the UK.” With a greater proportion of the market becoming financeable, Martin sees opportunities but admits this increase in investor appetite has been surprising: “We did not account for robust recovery in investor sentiment.” However, when it comes to accessing UK property there are certain issues investors need to get to grips with. Hargreaves Lansdown head of financial planning Danny Cox admits there is potential in the UK property market but does not see open-ended funds as the best way to get access. Cox says: “We need to look at the history of property funds. They once experienced a huge amount of cash flowing into them and as money came in it became difficult to restrict flows – then they started buying properties for the wrong reasons. “I do not think open-ended funds are stable for this asset.” Bestinvest managing director of business development & communications Jason Hollands, who likes the Henderson UK Property fund due to its London and south-east England bias, does see property as an attractive asset class. However, he points to the fact that even if property yields are attractive, closed-ended funds have the potential to erode this due to their hefty price tags. Hollands says: “Our neutral view is that closed-ended structures are the better way to do this. But some of them are trading at very big premiums. “The £1.1bn F&C Commercial Property trust is one we like but it is a bit dear.” Yellowtail Financial Planning managing director Dennis Hall also prefers closed-ended structures in the form of REITs and says: “With REITs, you are not going to have to sell things because of redemptions – I would not want my manager to have to sell things. “Yes, it could be trading at a discount but the actual fund is going to be protected.” However, not all commentators believe open-ended funds should be avoided altogether. David Hambidge has recently taken the Premier multi-asset range’s allocation to commercial property to more than 11 per cent, up from around 5.5 per cent, through a combination of listed property funds, open-ended funds and some more specialist vehicles. Premier head of multi-asset research Ian Rees says: ”There is a danger that if you solely focus on the open-ended funds you may get into the liquidity issues the sector experienced a couple of years ago. “But we think it’s important to use a combination of instruments and avenue to build property exposure.” Taylor Scott International
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