Property managers have admitted they are finding it more of a “challenge” to find quality assets to invest in following a flood of money into the sector.
Data from the IMA shows the sector raked in £2.6bn of net new money in the first eight months of this year, the second most into any sector behind IMA UK Equity Income.
Investors have been drawn in by the prospect of steady dividends and a purple patch for capital gains on properties.
But managers have warned of increased competition in core areas affecting their ability to purchase properties, adding the quality of some new property stock being brought to the market to satisfy demand has been questionable.
Ainslie McLennan, co-manager of the Henderson UK Property fund, said she has had to be “quite dynamic” in putting the extensive inflows to the fund to work because of increased “competition”.
Ms McLennan said she had bought just under £740m worth of properties this year but has had to move into lesser-known areas such as “private hospitals, leisure facilities and cinemas” to do so.
She said the year so far had been a “good challenge”, especially given the fund’s focus on core areas of the prime property market, which has seen the most competition.
Gerry Ferguson, manager of the £3.2bn Swip Property Trust, said: “Given the strength of the market in recent months there are certainly fewer attractively priced properties that meet our quality criteria.”
But Mr Ferguson, along with Philip Nell, manager of the Aviva Investors Property Trust, said the scale of his fund allowed him access to certain properties that his competitors could not reach.
Both Mr Nell and Ms McLennan said several of their property deals had been completed “off market”, meaning the process was not subject to a public competition between all the property managers.
Mr Nell said of the eight deals he has completed so far this year, totalling £260m, only two were in full competition on the market, with two others in limited competition and the remaining four done completely off the market.
He said there had been quite a lot of property assets coming to market, in an attempt to exploit the increased demand, but like Mr Ferguson he warned that some of the new stock “has not been great quality”.
Managers are under pressure to buy properties because investors are worried about ‘cash drag’ on the funds.
If a fund has a large amount of cash instead of property assets – for instance, if it receives a lot of inflows but cannot put that money to work – then it will reduce the yield on the fund, which is the main draw of property funds for most investors.
Mr Nell said he had 9.5 per cent in cash and another 5 per cent in property equities, which he said was usual but he was still looking to reduce it.
“Other funds have more cash on their balance sheets and there is cash pressure – some peers have appeared on bidding lists for everything,” he said. “It is less easy to find opportunities than six to 12 months ago but you are still able to find them if you are patient.”
