Bias to property is safe as houses
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Strong performances in property have prompted investors to consider the asset class, particularly the commercial and residential British markets, which are well regulated and transparent.
As the crisis in the eurozone looks set to rumble on, the appeal of safe havens has only grown in recent months. With many asset classes already looking expensive, property, once the darling of the investment community, may be due a revival.
Richard Kirby, the director of property funds at F&C and the lead manager of the F&C Commercial Property trust (FCPT), says the sector has seen some strong performance in recent years.
“We had very strong performance last year. The underlying properties delivered a top decile return, which has continued our top quartile performance over both three and five years,” he says.
Over five years the FCPT has lost 3.40% against an IT Property sector average fall of 35.48%. Moreover, the trust has returned more than 70% over the past three years, versus 51.28% from the sector.
Kirby says the driving factor behind the recent success has been the trust’s focus on prime British property. (Investment trusts continues below)
“We’ve seen rents and capital values under pressure. Under these conditions prime is holding up better than secondary, and London and the South East is doing better than the rest of the country,” he says.
“We have a significant weighting to central London and much lower exposure to the regions. Within that we have no exposure to shopping centres.”
One of the most interesting developments of recent years that has allowed central London to shrug off the sector’s woes elsewhere is that buying has been dominated by foreign investors.
Indeed the pricing is such that domestic buyers are finding it progressively difficult to compete with the strength and depth of overseas buyers.
This disconnect helps explain how the trust has distanced itself from its peer group and perhaps suggests a reason for optimism despite ongoing macroeconomic concerns.
Kirby, however, warns against over optimism and says that most of the factors that differentiate the capital and the South East have already found their way into prices:
“The trust has been trading at a premium for the past three to four months. Would I be buying into central London at the moment? No. Given that rental growth is going to be flat or even negative I have been focusing on properties with fixed rent increases in their contracts.”
While the British property sector has begun to rebuild trust by delivering solid returns over the past few years, the memory of the 2007-09 slump will still rankle those who had their fingers burnt.
High valuations of prime property and a weakened outlook for the secondary market may keep some from rushing to return.
However, weakness in European markets might well provide further impetus for property prices this year. In particular institutional investors and pension funds holding low-yielding government debt and investment grade corporate debt could find the income component appealing.
“If the old economy bricks and mortar as a store of wealth argument still holds, money could well move to the UK from the Continent,” Kirby says. “The income stream from property is particularly attractive. You’re looking at an income total return of around 8% at present.”
”The income stream from property is particularly attractive. You’re looking at an income total return of around 8% at present”
With American 10-year Teasuries yielding 1.91%, British 10-year gilts 2.10% and German bunds 1.67% traditional sources of income still look squeezed. Though this may not be enough to send vast swathes of investors scampering back into commercial property it may tempt some to look again at the sector.
For those who do, Kirby says Britain offers one of the highest quality, most liquid property markets.
“The UK is a very mature, transparent market. It’s the largest in Europe and we have a clear legal process. You’re seeing strength and demand in both prime residential and commercial property,” he says.
Of course, property is not immune from the broader economic malaise and, especially in the current environment, the importance of understanding a manager’s style should not be underestimated.
Kirby says while the process is rigorous he follows a key mantra for his investments:
“Within the portfolio we are very proactive but one of my simple mantras is that you hold buildings that you can re-let.”
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