Uncovering value and avoiding bubbles

For the five years to 11 April 2014 the average return of the IMA UK Property sector was 61.46 per cent, just ahead of the IPD UK All Property index return of 58.05 per cent in the same period.

Looking ahead, in early April Ignis Asset Management revised its forecast for UK commercial property in 2014 from 11.5 per cent to a 15.5 per cent total return for the asset class. It suggests the increase will be driven by an acceleration of capital value growth through further yield compression.

Ignis forecasts all major property sectors will generate capital value growth over a three-year horizon, resulting in an annualised total return of 10.7 per cent over the period. The rates of capital growth will be front loaded, with the greatest impact expected in 2014.

George Shaw, manager of the Ignis UK Property Fund, notes offices are expected to deliver the highest performance of the broad sectors, followed by industrial and retail.

He adds: “Demand for Central London assets, both retail and offices, will remain strong in 2014. The acceleration of the leasing market with the prospect of rental growth will continue to support investment performance in this market.

“Yield compression in regional markets is also expected to continue and the scale will depend on the extent that those buyers, unable to secure assets in Central London, switch their focus to these alternatives.

“Both UK and overseas investors are searching for opportunities beyond London and the south-east, with funds in particular focusing on stock offering the potential for asset management angles”

Fund performance

Latest figures from the Skandia Investment Platform reveal that while multi-asset funds remain among the most popular offerings, property funds also continued to find favour with investors, accounting for roughly 13 per cent of net sales over the first three months of the year.

Dean Bowden, head of investment solutions at Skandia, adds that the “unsurprising” popularity of multi-asset funds and outsourced discretionary managed portfolio solutions has been indirectly responsible for a significant increase in allocations to UK equity funds and property funds “as confidence in the UK market and economy continues to grow”.

The latest figures from the IMA concur and show net retail inflows into the property sector in February of £297.6m, bringing the total assets under management in the sector of roughly £19.5bn.

The best performing fund has for the year to date to April 11 2014 is the Scottish Widows HIFML UK Property vehicle with a return of 8.4 per cent. This is compared with the IMA sector average of 2.41 per cent and the IPD UK All Property Index return of 2.27 per cent, according to FE Analytics.

Of the top five property funds for the year to date three have a European mandate – Henderson Horizon Pan European Property Equities, Swip European Real Estate and Premier Pan European Property – and another has a global focus in the form of the HSBC Open Global Property.

At the other end of the scale, the two worst performers so far this year are both focused on Asian property, the Henderson Horizon Asia Pacific Property Equities fund with a loss of 6.75 per cent and the First State Asian Property Securities fund that dropped 5.28 per cent, according to FE Analytics.

This suggests that while property is coming back into fashion as an asset class, some regions are performing better than others. Asia seems to be feeling the impact of concerns in the emerging markets surrounding China, while in the UK some are warning of another housing bubble.

Is it a bubble?

Ian Fergusson, chief surveyor at Sesame Bankhall Valuation Services (SBVS), earlier this month suggested that housing markets in London and Aberdeen show “mounting evidence” of a potential housing bubble and could face a significant drop in prices if a bubble manifests and bursts.

“It was this very scenario when, in the months leading up to the housing crash of five years ago, surveyors came under increasing pressure from buyers, sellers and estate agents to match valuations with agreed sales prices,” explains Mr Fergusson.

“Yet there can be a significant difference between the price a property sells for and the value that a surveyor places on it.

“And that gap is, in certain hotspots, once again being stretched to the limit in some areas, just five years or so after a major correction in the housing market saw prices plummet throughout the country, raising the question of whether any of the lessons have been learned from the housing crash.”

At the same there are concerns about the level of construction output in the housing market, which combined with demand for both residential and commercial property, is putting pressure on property prices.

Duncan Kreeger, director of West One Loans, a privately funded short-term secured lender in the UK, notes: “This lack of new property is exacerbating the housing crisis and has forced property prices up by more than ten per cent in the same timeframe. Construction is still lagging behind the rest of the economy when it should be the forefront of progress.

“The industry is still recovering from the recession. The number of small construction firms is still at an historic low, and if they hadn’t been starved of funds they need by mainstream lenders, more small construction firms would definitely be building more in 2014. For a sustainable property industry, the construction industry needs to undergo a real transformation this year.”

While performance of property funds remains positive, the question is whether this is the calm before a bubble-bursting storm or if the property market, especially in the UK, truly has learnt the lessons of the past.

With UK interest rates set to remain low until early next year at least, the property market could be an interesting area to watch, and with European property funds outperforming their UK counterparts, the best opportunities could be further afield.