First State’s Nicholas tips US retail property

The manager of the £82m Global Property Securities fund said that general growth in rents was being undermined by the negative newsflow emanating from Europe. However, he tipped commercial and retail property in the US to continue to perform strongly.

Mr Nicholas said: “In spite of the crisis in the eurozone, the picture across Europe is mixed. Demand for German residential property and all sectors in Switzerland remains high. However, city markets such as Paris and Amsterdam are under pressure.

“The outlook is improving in the US. Apartments is the best performing area of the commercial property sector due to strong rental demand. Good performance has also come from shopping centres focused on higher-end tenants.

“The negative economic backdrop is undermining rental growth, banks are reluctant to provide finance and real estate markets are generally sluggish. On the positive side, development pipelines are limited and in some markets rents are increasing slightly.”

In spite of his bullish US outlook, Mr Nicholas said he was maintaining an underweight position in the US market overall, or 61 per cent at the start of this year. He is also underweight Japan and the UK, on 3.9 per cent and 4.6 per cent, the latter partly driven by a decline in demand in London.

“London’s commercial property sector is still in relatively good health, although demand is slipping in the office market because of job losses in the financial services industry,” he said.

According to the Global Property Securities fund’s December factsheet, Mr Nicholas has been buying Japanese real estate investment trusts (Reits), particularly those investing in residential property and logistics companies. He also increased the fund’s weighting towards Link, a Reit which owns shopping centres in Hong Kong, to 2.5 per cent of the portfolio. This move is part of a wider focus on Asian commercial property Reits – 18.3 per cent of the fund – which the manager said are not affected by government policies targeting residential property demand.

The First State fund was the best performer in the IMA Property sector in the five years to January 20, according to Morningstar, and was the only fund to have posted a positive return over the period, gaining 6.7 per cent. Over three years the fund also topped the sector with a return of 84.9 per cent compared with a sector average gain of 36.7 per cent.

The £6.8m First State Asian Property Securities fund, which Mr Nicholas also runs, lost 9.2 per cent over five years but still outperformed the sector, which lost 24.7 per cent.

Mr Nicholas is due to speak to the Alpha Generators roadshow, beginning on January 30.