UK attractive for CF OPM Property

CF OPM Property saw huge lows in its multi-asset fund-of-funds in March, but it has seen better results since. Manager, Henderson, says the best commercial property opportunities lie in the UK.

Barratts has raised £720m from a rights issue to pay down debt. Aviva is understood to be lining up a £500m property recovery fund. Dragon’s Den star, James Caan, is putting 10% of his personal wealth into a joint venture between his Hamilton Bradshaw operation and ING. Flotations, such as Max Property’s £200m deal in May, were oversubscribed. Even New Star’s moribund property fund may soon open again to investors after its long closure. Everybody is piling into
commercial property again. Should you too?

Ross Henderson at CF OPM Property certainly thinks so. And unlike the other fund promoters, he has a slightly different perspective – Henderson runs a multi-asset fund-of-funds that tracks the highs and the lows of property investing.

Unfortunately, he did not choose the best of times to launch this fund. It came to the market in May 2007, just weeks before commercial property valuations hit their peak. On March 8 this year the fund was down 62% from launch. This may lead some observers to question his perspicacity. The best that can be said is that it could have been worse – although not much.

But today he is in chipper mood. Since its March low the fund is ahead 60%, although it still has some way to go before it climbs back to its launch price.

During the downturn, Henderson reduced some of the fund’s risk and volatility by purchasing bond funds such as M&G Index Linked and Schroders Strategic Bond, and a product structured by Barcap which pays a yield of close to 18% using the convertibles of the likes of British Land.

These sort of vehicles mean that the fund has, at times, been almost one-quarter invested outside of either property collectives or direct property equities. The upside was that these moves did indeed cut volatility, but meant he lost a little on the upside when property funds started to bounce back.

“We knew there would be an upturn in commercial property, but like everyone else we didn’t know when. No one rings a bell for these things. We decided that the recovery in bonds was more certain on a risk-reward basis and that fixed interest would offer a more definite recovery. Yes, they didn’t go up as much as the Reits, but it did a lot to dampen down volatility.”

Henderson has moved swiftly in recent months to reduce his fixed interest exposure, cutting holdings in M&G Index Linked from 6% of the fund to zero. In total, fixed interest now accounts for just 2.67% of the fund and cash is just over 5%.

Over the past three months, the fund is up about 28% compared with the average fund in the property sector. Over one year it is showing a decline of around 8% compared to the sector average fall of 16%.

It helped that the fund had a decent exposure to funds investing in Asian property. These were an early indicator of the turnaround in global markets in March – beginning to recover from the start of the year onwards. Henderson played the sector mostly through First State Asian Property Securities, plus Trikona Trinity Capital, an Indian property fund. He also holds an iShares Asia property fund.

Currently he is a little more cautious about the Asia property story. He is not cutting his holdings, but as money comes into the fund, he is not adding to them either.

“There are opportunities in so many markets now. The Far East was the first to recover but today we see more compelling ideas elsewhere.”

The fund, apart from cash and the small amount of fixed interest, is a roughly 50/50 split between direct property
equities and Reits.

Henderson acknowledges that he missed out on some of the ultra-cheap stocks that have since bounced back massively.

He mentions Taylor Wimpey at 3p (now 50p) wistfully – but says taking a position back then was a ‘binary bet’. In other words, it was for the punter at Las Vegas betting everything on red, rather than a sober judgement by a fund manager.

But he has enjoyed the ride with some soaraway stocks. He cites Kenmore European Industrials, which he bought at 16p in April and quickly went to 36.5p, at which point he banked some of the profit, then went back in again when it fell back.

Despite the fact that it has the most indebted property companies that have rebounded most – largely because the market no longer sees them going bust – Henderson prefers the ones with cleaner balance sheets.

Among the housebuilders he prefers Berkeley, which has virtually no debt. He reckons investors should steer clear of Barratts, whose rights issue was, after all, equal to nearly 80% of its market capitalisation. “I think the market’s getting exhausted with the flow of rights issues,” he says.

When it comes to distressed property he is on the side of the vultures, rather than bombed-out sellers whose share price might recover as buyers appear.

For example, take a look at New Star. Ross Henderson reckons its new owners (yes, called Henderson too) may not be far off from reopening the fund to redemptions. “But how long will the queue be?” he asks. One retail development the New Star fund acquired was sold on, he says, for only one-quarter of its acquisition price. As the fund has to meet redemptions, will this sort of fire-sale continue?

That said, Henderson says some of the most attractive commercial property opportunities now lie in the UK, largely because we now look so cheap on a global basis.

The ongoing collapse of sterling is an opportunity for foreign buyers to seize prime assets in London at once-in-a-generation prices. It is no wonder that funds in Singapore, China and Australia have been snapping up London property.

It is a compelling story. Valuations are still way below their peak and large amounts of cash is being lined up in various funds to purchase property.

But let us sound a note of caution. Asset prices rose so much and yields fell so much because banks were willing to lend huge amounts at ultra-low rates. Those days may not return for another decade. The short-term outlook is good, but is the long-term picture so rosy?