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Fund Review: Property

Introduction

Latest figures from the Office for National Statistics April House Price index showed that the cost of property in the UK rose by 9.9 per cent in the 12 months to April 2014, which is the highest annual increase in UK property prices since May 2010.

In addition, house prices in England rose 10.4 per cent in the 12-month period, mainly driven by the London property market, which according to the ONS, means “England is the only UK country where property prices are now higher than the pre-financial crisis peak of January 2008”.

The combination of government initiatives to get people on the property ladder and encouraging more banks to lend, along with low interest rates, has helped boost the property market.

But with the Public Accounts Committee recently noting that the government’s Help to Buy initiative “violated Treasury guidelines”, and the introduction of the Mortgage Market Review for tighter lending criteria, there are attempts to dampen what could realistically become a property bubble.

Peter Rollings, chief executive of Marsh & Parsons, says: “The growth rate currently being experienced in the London property market is eclipsing the rest of the UK. With its international appeal as a sanctuary for capital investment, and its allure as a vibrant city to live and work in, the level of demand for property in London is unparalleled across the rest of the country.

“But we’ve reached a turning point. After a very lively start to the year, where an acute lack of supply and subsequent competition for homes pushed prices higher, we’re now sailing into steadier waters. Stricter controls for mortgage affordability and the renewed housing stock is moderating the market and property price growth has slowed.

“London is not representative of the broader nationwide picture. If the government or the Bank of England were to slam their foot on the brake too heavily, they risk setting back the emergent housing market recovery outside of the capital.”

For most investors, the choice is between direct property and indirect property funds, which mainly invest in the commercial, retail and industrial property sectors. However, the boom in UK housing certainly helps to buoy confidence in the wider property sector.

Figures from the IPD UK Monthly Property index show that the sector delivered a return of 16 per cent for the 12 months to May 31, with the office sector posting the highest return of 21.4 per cent. Meanwhile, industrials delivered an equally strong performance of 20.7 per cent, with the retail sector trailing some way behind with a return of 11.1 per cent.

But with the governor of the Bank of England, Mark Carney, hinting in June that UK interest rates could rise by the end of 2014, albeit gradually, and with growing pressure on the government to try and cool the UK housing market, there is a fine line to tread between preventing a bubble and damaging the country’s economic recovery.

While property may be in favour now, investors would be wise to learn from the financial crisis and be prepared for any macro changes.

Nyree Stewart is features editor at Investment Adviser

Fund picks:

Premier Pan-European Property

This £106.5m fund, managed by Alex Ross, tops the IMA Property sector for the 12 months to June 17 with a return of 24.46 per cent, according to FE Analytics, more than 4 percentage points ahead of the next fund. It aims to provide income and long-term capital growth from a portfolio consisting mainly of European property company shares. Its largest geographical weighting is to the UK at 47.4 per cent of the fund, while the retail sector accounts for 41 per cent of the portfolio.

Schroder Real Estate Investment Trust

This £190.4m closed-ended offering is managed by Nick Montgomery and Duncan Owen and has delivered a three-year return of 81.12 per cent that tops the list of all the constituents of the five AIC property sectors. This performance has helped place it in the Investment Adviser 100 Club for 2013. It aims to provide shareholders with an attractive level of income through investing in a diversified portfolio of UK commercial property. Its largest sector weighting is to offices at 41.8 per cent of the portfolio.

Editor’s pick:

Aberdeen Property Share

This £306.1m fund is managed by the Pan-European equity team at Aberdeen Asset Management and is benchmarked against the FTSE 350 Real Estate index. It has delivered top-quartile performance against its IMA Property sector peers for one, three, five and 10-year periods to June 17, according to FE Analytics, propelling it into the Investment Adviser 100 Club in 2013 for the first time. Its 12-month return of 13.62 per cent is roughly double that of the sector average of 6.38 per cent.

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