British property grows in popularity as investors seek attractive valuations from a market that offers diversification and an income as it reverts to stable behaviour with low volatility.
Large property funds, including those run by Aviva and M&G, have begun increasing their exposure to the British market. Philip Nell, manager of the Aviva Property Trust, has about half the portfolio in British retail properties.
The M&G Property Portfolio has invested a further 7% in properties with high yields in anticipation that rents will stabilise. Fiona Rowley, the fund manager, points out that the market has seen a good rally since July 2009 and this has slowed, leaving it at sustainable levels. While there is unlikely to be significant capital growth from here, she is finding opportunities at good valuations.
British property is also gaining in popularity within the Adviser Fund Indices (AFI); the M&G fund is in the top five picks in both the Balanced and Cautious index. (article continues below)
Ben Willis, the head of research at Whitechurch Securities, has property positions in both his Cautious and Balanced AFI portfolios. “We’ve held that since the last quarter of last year. As a house we started investing in property in September of last year. Fund managers said the market had bottomed in July last year and was reverting to type; not expecting large capital gains but with income producing and modest capital growth characteristics.”
“There are still some issues with weak tenant demand, but we’re confident with valuations,” says Willis. “You’re getting an average yield of 7% – compared to cash and even gilt rates that’s very attractive. You get a nice whack of income. And in volatile markets you’ve got a lack of correlation with equity and bond markets. There are still some potential headwinds economically; there’s still a lot of money going into the sector. But banks are releasing property into the market as they’re getting better prices. It can be an illiquid market, and there’s still some way to go for the secondary market to rebound.”
“Property is back to behaving how it should, with low correlation to equities, low volatility and a yield,” say Cockerill. “The amount of liquid assets in these funds has increased significantly, although they did manage the downturn very well, which is why we selected them. From my perspective, though, there’s a danger of looking at where the IPD [Investment Property Databank index] was and where it is and saying there’s quite a lot of ground to be made up. I’m not convinced that’s going to happen. There are pockets that are performing more strongly, such as London office space, but we’re back to a more stable footing. It’s dependent on the performance of the broad economy and that’s still up for discussion with the austerity measures over the next six months. But if you want diversification and a bit of income, a bog standard bricks and mortar fund will give you that.”
Cockerill also notes that the big banks have large property portfolios and for a while were sitting on fairly substantial losses. The values are largely back on an even keel, putting banks in a position to start offloading these properties; this will keep a lid on prices.
At present Willis is comfortable holding just British property. “We did have an ill-fated holding in Henderson International Property, which ran into liquidity issues. We’re a bit wary as we’ve had our fingers burnt. Also we’re more inclined to get direct bricks and mortar exposure. In international funds you tend to hold property shares or Reits, which in the short term can behave like equities, so you get volatility. But we’re keeping an eye.” Bearing out this view, First State Asian Property Securities was ejected from the indices at the rebalancing in May.