William Hill, head of property business at Schroders, answers this week’s questions from Tomas Hirst.
Q. Commercial property funds suffered record outflows of £48m in October 2007. What are your predictions for the commercial property market over the next two quarters? A.
A.This is a difficult question to answer as it depends on the starting point. Indices are lagging the real market and there has been a wide dispersion of published returns in the fourth quarter reflecting the difficulties valuers seem to be having in keeping up with the market decline. I expect the first half of the year to be negative but [there is] every prospect with falling interest rates that this could be the point the buyers return in numbers. The total decline from the peak will be about 15 to 20 % depending on property type.
Q. Some market commentators have suggested that there has been a trend away from property unit trust funds to property securities funds. How far do you agree with this analysis? A.
A.First we must distinguish retail from institutional investors. The retail funds with their daily dealing are vulnerable to runs on funds as there is a mismatch between the liquidity to the investor and the underlying assets.
We have never contemplated running a retail fund without a high percentage in listed securities. Our only retail fund, Schroder Global Property Securities, is 100% securities and global to give added diversification from the UK cycle. There is no evidence that institutional investors are switching from unit trusts to securities.
Q. Given market conditions would you consider the property sector to be undervalued? A.
A.We published an article at the end of last year that concluded it had reached fair value on a technical basis. It may get cheaper. There will be some attractive buying opportunities over the next few months from some forced sellers.
Q. What impact did the appointment of Ian Mason to head of UK property fund management business have on Schroders property funds’ performance through the credit crisis? A.
A.None. Ian is on gardening leave and will join us in April. He has chosen a good six months to sit in his garden.
Q. There have been rumours of a £1 billion UK property fund to be launched this year by Schroders. Can you give any information on it? A.
A.We intend launching our third UK property opportunity fund with a first closing scheduled for April. It is not available to retail investors. We have strong interest in the fund from our client base and expect the equity to be oversubscribed.
Q. Does the launching of a fund demonstrate that Schroders sees property prices as bottoming out at the moment? A.
A.We are already seeing some attractive deals. It may be that prices go down further but investing back into the market over the next 18 months will mean that we hit the bottom of the market. Good deals are more plentiful with markets on the drift than when they start to rise.
Q. Are there plans to launch a property fund aimed at retail investors in the UK in the coming year? A.
A.We are exploring some interesting ideas and do not rule out a new product alongside our global property securities fund.
Q. It was reported that Schroders had decided to cut the redemption price of its units in its British property funds. What were the reasons behind this? A.
A.We have not ‘cut’ the redemption price on our institutional fund. The trust deed puts an onus on us as manager to ensure that all investors are treated fairly. In particular outgoing investors should not be paid out yesterday’s value tomorrow in a rapidly falling market.
Unitholders who served their three-month notices at end of September were given a redemption price six weeks after the notice date in accordance with the trust deed at which they were to be paid out in December. The price we gave was our estimate of the bid price at December based on the anticipated NAV at this time. It was going to be different to the price at September. We called a fall of 12.5% with the outturn being 12.7%.
Q. Some companies, including Aegon, Scottish Equitable and Scottish Widows, have instituted deferred withdrawals from their property funds to combat the continuing high rate of redemptions. Has Schroders considered following a similar route? A.
A.For the first time in the fund’s history we did exercise a right to defer the September redemptions as we were not confident that purchasers of properties on the market would honour their offers. We were successful in paying out 50% of the redemption value on time and expect to clear the balance by the end of March 2008. There were nominal redemptions at December for payment in March.
Q. What effect, if any, will continuing problems in the American property market have on British commercial property? A.
A.Very little as the markets are not closely correlated.
Q. When does Schroders predict Britain will begin to see a recovery in the commercial property market? A.
A.We expect some signs of recovery in the second half of the year.
Q. What do you see as being the advantages of real estate investment trusts (Reits) over direct investment in the financial troubles? A.
A.There is no one way that institutional investors should access property. Last year was a bad year to be enlisted as falls were larger than for direct investments. The challenge for the industry is to look for ways to provide access for all different kinds of property investment within a portfolio.
For the retail investor the difficulties of the last few months have raised a flag about whether daily dealing in property funds is appropriate given the level of liquidity required by these funds. It might be more appropriate for retail investors to deal exclusively with property securities.
Q. With the Schroder Global Property Securities fund’s investments in Singapore and Hong Kong, does Schroders believe that the retail market in these areas will successfully decouple from the global slowdown? A.
A.Real estate markets are based on local pressure, for example supply and demand factors within individual cities. If you’re building too much then the prices will go down and if you’re not building enough the prices will rise. Due to this, the sector will remain popular as global property at face value has more diversifying potential than many other sectors.
Over recent years the difference has been that yields have become much more correlated than they used to be. This is mainly owing to the ability of foreign money to travel more easily to exploit areas where they can see value.
William Hill is head of property business at Schroders Asset Management. Hill joined Schroders in 1989 and was appointed managing director of Schroder Property Investment Management in 1991. He previously worked at Drivers Jonas from 1982 and is a member of the Royal Institution of Chartered Surveyors.