Property funds dealing with outflows from the sector have received a boost from the London commercial market’s apparent ability to confound Brexit-based fears.
Both Henderson and M&G have switched their UK funds to bid pricing this week, a sign of the changing fortunes for the sector.
The underlying picture, however, appears better than some had expected. Figures from real estate adviser CBRE show £3.5bn was invested into London’s office market during the first three months of this year, on par with the first quarter of 2015.
Property portfolios have seen three consecutive months of net retail outflows at the start of 2016, concerning those who believe redemptions from the illiquid asset class have begun at the same time as a slowdown in areas that have previously driven returns.
Allocators such as Premier’s David Hambidge told Investment Adviser earlier this year that the asset class’s post-crisis recovery had “run its course” in areas such as London. The capital’s reliance on foreign investment has been seen as a further headwind this year as buyers sit on their hands in the run up to June’s EU referendum.
But Jamie Pope, head of London capital markets at CBRE, said of the latest figures: “Some investors are experiencing political and economic uncertainty at the moment, so it’s heartening to report this hasn’t caused much in the way of turbulence in the London office market in the first quarter of the year. Yields are stable and, in some cases, the prevailing conditions are making investment at this time a more attractive prospect.”
The firm forecasts that investment volumes may be more subdued during the second quarter of the year closer to the vote, but will rebound during the second half of the year as long as Britain decides to remain in the EU.
Nor have international investors been deterred by the uncertainty. Overseas investors accounted for more than £2.4bn of investment and were involved in 67 per cent of all transactions.
Neuberger Berman’s Gillian Tiltman, manager of the firm’s Global Real Estate fund, said she was continuing to back London-centric names such as Shaftsbury and Great Portland.
“Shaftsbury owns shops and restaurants in the West End concentrating on Carnaby Street, Chinatown, Seven Dials, the St Martin’s Courtyard area and Soho, so we are big fans of that company.
“We also like Great Portland. It’s just impossible to build new stock in the West End for offices and we think Great Portland is well positioned and the valuation was looking very interesting earlier this year.”
| Key numbers |
£166m – Outflows from property funds in first three months of 2016 £3.5bn – Amount invested in London office market over same period |
Canada Life’s head of property research Joanna Turner said that the recent demand for London office space has been driven mainly by business services and the technology, media and telecommunications sectors.
“Highly skilled, creative millennials are increasingly looking to use workspace in more flexible ways than their older, baby-boomer counterparts. Instead of working nine-to-five in a traditional office environment, they are much more mobile and seeking to balance the demands of their work with their lifestyles,” Ms Turner said.
“A new wave of flexible space specialists has been capitalising on these growing trends not only around London, but also in major cities around the UK.”
The uptake in London commercial property comes despite investors exiting property funds. The sector suffered net retail outflows of £119m in February this year – the largest since November 2008 – and £20m was lost during March, meaning total outflows of £166m during the first quarter of this year.
Some fund buyers have become more circumspect as a result. Whitechurch Securities’ research team remain positive on property, and believe the outflows were in part due to investors switching back to fixed income after an uptick in yields on corporate bonds.
But they acknowledged: “After some very good years of consistent performance, we are reviewing exposure to the asset class”.
