Scarred by investor experience

Investors seeking out a yield alternative are turning to property funds but the post-crisis scars remain and finding the right portfolio is not as straightforward as it once was

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The haphazard state of play engulfing bond markets is providing a boost to property funds as investors seek out a yield alternative. But post-crisis finding the right portfolio is not as straightforward as it perhaps once was.

In April, the IMA Property sector notched up £98m in net retail sales, more than triple the £33m invested in March. A spate of recent data has pointed to the UK economy slowly getting back on its feet. On top of this, the banks have improved their capital positions and are not the forced sellers they once were. In addition, private sector buyers, particularly from overseas are now buying portfolios of real estate from the banks attracted by the returns on offer.

On the back of such factors, Mark Burgess, the chief investment officer, at Threadneedle Investments says that having been underweight, the group is moving, albeit modestly, overweight property.

For his part, Bill McQuaker, head of multi-asset at Henderson Global Investors, has recently shifted some fixed income exposure into commercial property. He says; “It does not look too exciting an investment but if we can buy some, with a 4.5 per cent yield, that will provide some inflation protection. We are not expecting really strong performance in capital growth terms but we would not be surprised if it delivers get 4.5 to 5 per cent yield over the course of a year.”

Traditionally, commercial property has been an income based asset class. But pre-credit crunch, in the midst of a prolonged rally, it became all about capital growth.

Ian Rees, co-manager of the Premier Multi Asset Monthly Income fund says: “I think it is an asset class, which has been scarred by investor experience, by what happened before. It has not enjoyed the same re-rating other income based asset classes have received.”

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Commercial property and its infamous fall from grace left many burnt when its bull market came to an abrupt end in the summer of 2007. By the July 2009, commercial property values had plunged by more than 44 per cent, according to the IPD UK Monthly index – the steepest decline it had endured since its records began. During the period initial yields jumped from 4.6 per cent to 7.9 per cent and a number of providers imposed lock-in periods in bid to stave off investor panic selling.

John Husselbee, chief executive officer of North Investment Partners, has not been as taken with the asset class of late, admitting that while he would consider it as a long-term diversifier, he currently has little exposure as finding a suitable vehicle is challenging.

He says: “The majority of our mandates offer daily liquidity which is not suited to gaining the best long term diversification benefits offered by this asset class. If we were to buy an open-ended fund then typically to offer daily dealing these are at best 80 per cent invested in property, with the balance in cash and short term deposits. This is a result of the experience of some funds which came under significant pressure at the end of the previous cycle where excess redemptions led to suspended dealing.”

From a UK perspective, historically, there has been a polaristion between prime London central and everywhere else, where the former has demanded the majority of investor attention. Notably some 72 per cent of banks with a presence in central London plan to streamline their real estate portfolios over the next two years to reflect the global economic landscape as they look at implementing more cost effective and efficient operational measures according to research from global property advisor CBRE. In its latest occupier survey, which included 19 of London’s largest banks, it found that 34 per cent expected to see consolidation of real estate assets in response to an expected rise in merger and acquisition activity in the sector.

But Rees says there are opportunities for those who look beyond the obvious central locations and focus on income sustainability. While open-ended funds have their own set of problems, closed-ended, despite having market liquidity, also present their own set of factors which should be considered such as pricing, where portfolios typically trade at a discount to net asset value .

But it is within this arena that for his part, Rees says opportunities are available, once investors broaden their horizons and focus on income sustainability. He cites specialist vehicle, MedicX, a property vehicle which specialises in primary care, medical and GP centres.

“It is a niche play but we are focusing on sustainable income. After all you can buy a cheap office but if you cannot fill it, your income generation will be hit,” he says.