Fund buyers cite historic ‘tailwinds’ for property

Not only are the prices for residential properties continuing to rise unabated but the investment management community appears extremely positive on commercial property at present.

Property managers from Ignis Asset Management and Threadneedle have recently issued bullish calls on their own asset class.

Don Jordison, Threadneedle’s property chief, predicted bumper gains this year in spite of a more than 10 per cent return last year, claiming he had “never seen so many tailwinds” for commercial property in his 30-year career.

Ignis’s £1.2bn UK Property fund manager George Shaw also upped his forecast for property returns in 2014 to 15.5 per cent, significantly higher than both his previous estimate and that of the International Property Forum.

But when managers are this bullish about their asset class it is good to put the sentiment to the test. One way to do this is to assess fund buyers’ appetite for the asset class in question.

Manager views

Several multi-managers are positive on property and its potential to provide continuing strong returns.

Property funds saw £298m in net sales in February, according to data from the Investment Management Association - just £5m short of the IMA’s mixed asset sectors combined, suggesting it is firmly back on the radar.

Fidelity’s Nick Peters, Apollo Multi Asset Management’s Ryan Hughes and Henderson Global Investors’ James de Bunsen are all backing the asset class to continue to deliver.

F&C Investments’ co-head of multi-manager Gary Potter said he had exposure to property in both the risk-targeted Lifestyle range - which has to have an exposure to property - as well as his unrestricted Navigator range.

Mr Potter said he was neither bullish nor bearish on property, but where he could find a skilled manager or a fund targeting a specific area he would invest.

The manager cited Creit, the Canadian real estate investment trust, as something which he had recently bought and owned in both fund ranges. He said the trust’s skill was focusing on smaller property deals as a way of adding value for investors.

Mr Potter has also backed Medicx, a healthcare premises development, management and investment company, for several years. The trust is a niche play on a specific part of the property sector, namely healthcare buildings.

“Our property exposure is driven by where we can find the expertise rather than buying the asset class,” he said. “We recognise property can make money but we have got to find the right fund and manager.”

Others are more broadly bullish on property with Apollo’s Ryan Hughes claiming commercial property is “in a sweet spot for investors”.

“It is benefiting from a strong recovery in the UK economy, combined with a scarcity of good quality property coming to the market,” he said.

“With so much property development being put on hold during the financial crisis, there has been little in the way of new development over the past couple of years.

“This is creating significant demand for high quality property in the right location which is enabling landlords to push up rents. This is good for rental levels, which in turn has a direct uplift of the properties’ capital values.”

The manager said the group’s Lifestyle funds had a zero weighting to property for a year until last November and now the Defensive fund has 4 per cent, Cautious has 5 per cent and Balanced has 6 per cent.

Henderson’s James De Bunsen said the multi-manager team began investing in commercial property 12 months ago and that it had been a “successful position, exceeding our total return expectations”.

“We continue to like it as an asset class, primarily as it still offers an attractive yield relative to government and investment grade bonds, and it is a good diversifier in a portfolio context,” he explained.

“The economic backdrop in the UK remains supportive and we’d expect this strong growth to translate into higher employment and consumer demand, and therefore into upward pressure on rents. Rental income is also a good hedge against higher than forecast inflation.”

Where are you weighted?

But the question investors must ask themselves before picking a property fund is where does the fund they are considering purchasing have assets. Is it heavily weighted to London or further afield?

Nick Peters, portfolio manager for Fidelity Solutions, said the UK prime property market had “already had a strong run” but the secondary market - largely outside the capital - “looks very attractive and could provide a decent yield and additional capital growth in the years ahead”.

“Secondary UK property has been off most investors’ radars for some time,” he said.

“However, with confidence returning to the economy, activity has been increasing in the sector, which could create value for funds with attractive development assets.

“The spread of secondary property yields above gilts is narrowing but a material gap still exists. The total return of the property benchmark (IPD Quarterly Universe) for the second half of 2013 was 7.5 per cent reflecting improved demand and a stable income profile.”

Expert picks: Multi-manager favourites

M&G Property

The £2.5bn fund is run by Fiona Rowley and was Apollo Multi Asset Management’s first property fund purchase it made in its return to the asset class.

Apollo manager Ryan Hughes said he was “attracted by the high quality focus” and the fact it does not buy property-related equities with uninvested cash.

“If you equitise cash you run the risk of it falling due to falling equity markets,” he said.

“This is exactly what happened in 2007/08 when funds thought they have plenty of ‘liquidity’ and then the equity holdings fell sharply and suddenly liquidity ran out. I’m a believer that if you want to take equity risk, you should buy an equity fund.”

Henderson UK Property

Henderson’s Marcus Langland Pearse and Ainslie McLennan have been involved in property fund management for more than a decade each.

The fund has produced a top quartile return in three years to March 28, according to data from Morningstar, and it pays a 4.2 per cent yield. It has seen a large growth in assets under management recently too after rising more than 100 per cent from £815m in March 2013 to more than £1.6bn now.

According to its most recent factsheet, the fund ended February holding 19 per cent in cash in spite of acquiring nine additional assets, 77.2 per cent in bricks and mortar assets and 3.8 per cent in property securities. The geographical focus is biased towards the South-East at 68.6 per cent.

Aberdeen Property Share

This fund invests in the equities of property companies meaning the bull market in stocks has helped drive the performance of this fund. For investors seeking funds which invest in ‘bricks and mortar’ this fund may not be for them.

It is, however, the best performer in its sector in both three- and five-year periods to March 28 and is the second best in the one-year term, according to data from Morningstar. The fund is also a member of the Investment Adviser 100 Club of top performing funds.

The £280m fund is managed by the group’s Pan European Equity team and has nearly doubled in size since the start of 2013 when it was £155m. The fund aims to achieve a combination of income and capital growth by investing mostly in UK property companies, although investment overseas is also permitted.