UK property valuations are at “very fair” levels even though they are significantly lower than prior to the 2008 crash, according to Henderson’s Ainslie McLennan.
The co-manager of the £989m Henderson UK Property fund said positive incremental changes in valuations were more reassuring than dramatic spikes up and down.
“We have come through such a difficult time in 2007-09 and we haven’t got close to getting back to those valuations,” the manager said.
Ms McLennan, who runs the fund alongside Marcus Langlands-Pearse, said the product was seeing “healthy inflows” as investors seek alternatives from volatile assets.
She said: “The fund has seen very healthy inflows over the year. There is money coming out of cash, some from bonds, some from commodities. I think it’s healthy that it’s coming from different places - a spread of asset classes.”
The manager described property as “the opposite to equities and bonds”, offering a gilt-style steady return but with roughly one-third the risk of equities.
Ms McLennan estimated that half of the recent interest in the fund had been from discretionary wealth managers, and half from the adviser community.
Ms McLennan said other property funds might struggle from tenants not being able to keep up with payments, but said the longer leases held by the Henderson fund would eliminate this problem.
The main tactical play in the fund is an underweight in high street retail properties, which make up just 5 per cent of its holdings. Ms McLennan said the changing habits of consumers in the UK had weakened high street shops, as people increasingly shop online or in retail parks.
“We are trying to find businesses that are relevant going forward and have longevity, and that aren’t at risk of massive change,” she said.
Instead, the fund owns retail stores in “robust locations” with little competition, such as a branch of Marks & Spencer in Nottingham and House of Fraser in Chichester.
Roughly 70 per cent of the fund is in the southeast of England due to the managers’ cautious outlook and the region’s strength relative to other areas of the UK.
The Henderson UK Property fund has underperformed the IMA Property sector in one, three and five years to July 31, according to FE Analytics. In three years, the fund returned 10.9 per cent compared with a 22.8 per cent average return from the peer group, while in five years, the fund has risen 2.3 per cent, compared with a 13.6 per cent average rise for the sector.
In June, Henderson announced it was combining its real estate business with that of US-based TIAA-CREF to create a European and Asian real estate company called TIAA Henderson Global Real Estate. Henderson has moved to reassure investors that there will be no changes to the management or process on the UK Property fund.
Is property on its way back up?
Although Ainslie McLennan stressed that valuations in the property sector were, generally speaking, fair value, asset managers are looking to move in to property due to its competitive attractive yield and low volatility.
Mark Burgess, chief investment officer at Threadneedle, said that in the past six months the firm had started to look more favourably at property.
Mr Burgess said: “We have become more positive on UK property, particularly given its attractive yield of 6 per cent. In addition the UK banking sector has been recapitalised – at least in part – having been a large forced seller of property in past two to three years, so this removes a major headwind at a time when the UK economy may be picking up.”
Meanwhile, Canaccord Genuity Wealth Management is also considering allocations to property in its discretionary portfolios, while Jupiter’s John Chatfeild-Roberts is on the hunt for a property investment for his Merlin multi-manager range.
