Property managers shift focus away from prime

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As London’s safe haven assets look increasingly expensive, property managers are beginning to find quality, value and income within second tier property.

Investors appear to be continuing their return to property, with the IMA Property sector recording £98m in net retail sales during April 2013, ranking it the 10th most popular sector, compared with £33m for the previous month.

Many fund managers are now pointing to an “up tick” in interest surrounding second tier property, driven by the relative stability in the UK economy and the hunt for value outside of London.

Kames Capital chief investment officer Stephen Jones recently expressed an interest in launching a property fund for retail investors, as new opportunities emerge within secondary property.

He says: “Our take on property as a group is there is a marked up tick in interest.

”There is a move away from the very expensive safe haven assets of central London and there is beginning to be some value in sensibly stock picked and assessed second tier, second city properties around the UK.”

Jones points to “active value opportunities” in properties that have “perhaps have come out of bank balance sheets or that have been warehoused elsewhere for a while”.

He adds: “They are now being more actively managed and producing a good income and potential for capital uplift in the years to come within a rehabilitated property market context.”

Within closed-ended funds, the direct property UK sector traded on a 5.68 premium according to figures for the end of April 2013, provided by the AIC and Morningstar.

Elsewhere however, the Winterflood Investment Trusts May monthly report details that the F&C Commercial Property trust is the only listed fund to avoid a drop in net asset value so far this year.

Standard Life Investments manager of the SLI Property Income Trust Jason Baggaley argues that secondary property continues to bring new opportunities.

He says: “People are moving out from central London where things are looking expensive. The yield gap between prime and secondary is also at an all-time high.

“If you look back over time, as we get into an economic recovery – and we seem to be getting there in the UK – it should actually be secondary property yielding double digits that starts to see the up tick, as people start to move up the risk scale.”

Baggaley highlights areas where there is low supply of good quality accommodation, such as Staines, Edinburgh, Glasgow and Manchester.

He adds: “I also like short leases in these areas because I don’t think this supply issue will change in the near future – there is very little building going on.”

However Baggaley is careful to distinguish between good quality and tertiary second tier property. He says: “There is not yet value in tertiary property. It won’t be long but at the moment I think quality secondary is the place to be.”

Jones also says that value opportunities require careful navigation, as some second tier property is actually third tier that would otherwise be knocked down.

Aberdeen Asset Management investment manager Sanjeet Mangat remains alternatively focused on prime locations and assets in the £168m Aberdeen Property Shares fund.

The fund invests in listed property companies and companies that derive a significant proportion of their profit for revenues from property.

She says: “London and the south-east remain more resilient and show more potential for long-term growth. Our portfolio is concentrated on prime assets here.

“In the current economy, it is quite hard to find other parts of the market where you are seeing anything in the way of rental growth.”

However Mangat details that the fund does include holdings with prime assets in other regional areas. She is also “wary” that some prime assets could become expensive.

Murphy Financial associate partner Adrian Murphy says that he is sticking to bricks and mortar property funds, and is cautious about any moves away from prime assets.

He says: “Prime retail property has proven to be recession proof, but outside of that things remain difficult. There is still a lot of risk in the market for both investment and business generally.

“So I would want to know exactly what the fund is investing in and the reasons for doing so.”