With investors flocking to the commercial property market, fund managers are competing with each other to secure the best deals.
The IMA Property sector has been one of the success stories of 2014 as investors are drawn to the asset class in search of income. But with so much new money in the sector, and a limited number of properties on the market, managers are finding their work cut out for them.
Ainslie McLennan, co-manager of the £2bn Henderson UK Property fund, said: “There are massive transactional volumes present that were not there 18 months ago. There is not enough stock to go around, especially in core style assets.”
Rob Martin, director of the £1.3bn Legal & General UK Property fund, said there are far more buyers around and managers “need to be proactive, not reactive, in this environment”. He noted that while there is a lot of global appetite for UK commercial property, especially in London, he saw a rising desire for regional assets too “as the economic recovery has percolated out of London”.
While the main bulk of the Henderson fund is in offices, retail and industrial properties, Ms McLennan said the best deals were now being found in other sectors. “Two to three years ago, student accommodation was an alternative part of the market but it is maturing so quickly,” she added. “We recently bought properties in Exeter and Glasgow and we are looking to buy more.”
David Wise, co-manager of the recently launched £80m Kames Property Income fund, said he had been avoiding the prime market.
“Our focus is more on the £2m-£15m end of the market, where there is an awful lot more stock right now,” he said.
“We want to get away from London and the South East as much as possible.”
Given the inflows, concern has grown that managers are sitting on mounds of cash, unable to invest. The fledgling Kames fund – which launched in March – has £30m, but Mr Wise said the majority is committed to transactions. He is looking to have a typical cash holding of 10 per cent.
Legal & General’s portfolio has 16 per cent in cash, down from 22 per cent 12 months ago. Mr Martin admitted that the “ongoing need to aggressively turn cash into investments” is a challenge.
But he claimed: “The fund’s scale helps when going for larger assets as there is a little less congestion at the higher end.”
After spending just under £500m on assets in the second quarter, Ms McLennan said she is not struggling with the inflows. She added that she would rather have cash than spend it for the sake of it. The fund has just shy of 12 per cent in cash and the aim is to keep it at roughly 10-15 per cent.
The Henderson fund recently shelled out £175m for 440 The Strand, the home of private bank Coutts, in a deal that took only three weeks to complete. “If the building had been in the £30m-£40m range, we would have had to compete much harder,” added Ms McLennan.
From tragedy to triumph – the investors’ darling stages a comeback
Before the financial crisis, commercial property funds were the darlings of retail investors. Relatively low volatility, coupled with strong capital growth, led to years of robust returns.
At the height of its popularity in 2006, the IMA Property sector enjoyed a staggering £3.6bn in sales. However, the notoriously illiquid asset class came a cropper when the credit crunch hit.
According to figures from the IPD UK Monthly index, between June 2007 and July 2009, British commercial property values plummeted by an eye-watering 44 per cent – the worst hit it had witnessed since its records began.
As investors in their droves went to cash in their chips, many funds had to impose lock-in periods to stave off a Northern Rock-style run on assets.
However, post-crisis and on the back of the improving UK economy, the asset class has reappeared on the radar.
According to figures from the IMA, commercial property funds notched up total net sales of £423m through the whole of 2012. By the end of 2013, this had more than tripled to £1.5bn.
This May alone, £491m of net new money went into property funds, sending the sector to the top of the sales charts.
The following month, with £316m of net new money, the category came second to UK Equity Income fund sales as the focus moved to the biggest fund launch ever, of CF Woodford Equity Income.
