Multi-asset managers have started restructuring their exposure to property on the view the asset class will be unable to repeat its recent stellar gains.
Many investors enjoyed healthy double-digit returns from UK commercial property last year, but a growing number of investors are sceptical such performance can last much longer.
In the first quarter of this year, total returns from all property sectors were 2.9 per cent, down from 4.1 per cent in the fourth quarter of 2014, the IPD quarterly index shows.
JPMorgan Fusion portfolio managers Tony Lanning and Nick Roberts said most of the returns in the sector would come from rental income as opposed to rising property prices.
“The vacancy rates should continue to fall and rental yields are likely to remain on an upward trajectory this year,” the duo said.
“However, the sharp fall in initial yields [and corresponding rise in prices] witnessed in 2014 is unlikely to be repeated.”
Mark Rimmer, product director of Premier’s multi-asset funds, agreed.
“We do not expect the same returns as last year and we now favour the secondary market away from the south-east,” Mr Rimmer said.
The secondary market tends to encompass properties that are generally located in poorer regions or buildings of inferior quality.
It is not unusual for the tenants of such properties to not be blue-chip companies and so the tenants may be looking for more flexible lease terms.
However, the secondary market is not entirely region-specific but there tends to be more secondary assets outside of the south east.
The stance by Mr Rimmer echoed that of Richard Levis, a global real estate analyst at Aviva Investors.
“We are continuing to see a narrowing of the pricing gap between prime and secondary assets,” Mr Levis said.
“[Secondary assets] can offer attractive yields and the potential to capture the ongoing improvement in the UK’s occupier markets, particularly in the office and industrial sectors.”
The office sector led returns in the first quarter of this year at 4.3 per cent, just ahead of the industrial sector’s 3.8 per cent, the IPD report shows.
The returns from the office sector are being driven by surging rents due to limited availability in central London.
A similar trend is taking place in industrial properties, as declining availability has helped shift negotiating powers to landlords.
While these managers are reorganising how their property allocation is structured, others are cutting back as they find the asset class less attractive.
Miton multi-asset manager David Jane said he had reduced his property exposure this year, cutting it from 12 per cent at the end of 2014 to 7 per cent last month.
“We are in no way bearish on the asset class, but we feel its relative attractions versus equities have reduced as a consequence of the rise in 10-year bond yields,” Mr Jane said.
“In absolute terms, [the sector] should still offer good prospects for income growth and capital gain, but less than before, reflecting the increasing maturity of the property cycle.”
‘Have we learned nothing from 2008?’
F&C Investments multi-manager Gary Potter says he has become concerned about a bubble in the property market, and asks: “Have we learned nothing from 2008?”
Mr Potter likes property as an asset class, but he does not currently hold any of the big property trusts, funds or companies.
He has opted for specialist property funds, such as Darwin Leisure Property, which invests in the UK holiday park industry, and MedicX, which invests in healthcare property.
However, his fears about a bubble in the sector has led him to reduce what little specialist exposure he had.
“I get quite concerned; it looks exactly like the same trap we had in 2008,” he said.
In that year, the value of retail property funds fell more than 40 per cent.
Mr Potter added: “In 2008, property was seen as the ‘holy grail’ of investing and it is in danger of replicating that.
“What concerns us is that the frenzy of allocation into property has gone far too quickly…there seems to be a dislocation between price and value.”
