Multi-managers boost property exposure

Multi-managers are increasing exposure to direct property as the sector’s recovery from the 2007-08 crash gathers pace.

Premier’s multi-asset team has doubled its exposure to “bricks and mortar” commercial property in its income-focused portfolios over the summer, buying into funds such as the Henderson UK Property fund and the Swip UK Property fund.

David Hambidge, head of multi-asset at Premier Asset Management, said he had upped exposure to commercial property funds from 6 per cent to 12 per cent and could increase this to roughly 15 per cent.

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“Property is clearly enjoying something of a renaissance,” Mr Hambidge said. “One thing that has put us off investing in open-ended property funds until now is that capital values have been falling and so it is not attractive to rely only on the income.

“Now, for something that yields so much, it doesn’t need much capital growth to post very attractive returns.”

John Ventre, head of multi-manager at Old Mutual Global Investors, said he was also increasing his property exposure “at the margin”, but said that any investment had to be long-term due to the high trading costs associated with dealing in illiquid direct property.

“Good-quality commercial property has a long-term payoff profile similar to an investment grade corporate bond, with two key differences: rents rise whereas bond coupons do not and property is a tangible asset.

“Today, the ‘cost’ of getting the inflation protection of owning the real asset is about 3 per cent more yield, so commercial property allocations are valuable in portfolios – less inflation risk, higher yield.”

Leading property indices show the UK has lagged behind the rest of the world in its recovery from the property bubble.

In five years to October 11, the FTSE Epra Nareit UK index has gained 30.7 per cent while the FTSE Epra Nareit Global index has risen 101 per cent. But in the past 12 months, the UK index has outstripped the global benchmark, gaining 25.7 per cent against 12.5 per cent.

In contrast, the Cazenove multi-manager team, led by Marcus Brookes, sold out of direct property in 2007, choosing to back cyclically-biased managers with significant exposure to the UK property sector.

Mr Brookes said: “For us the property market looks expensive, particularly in London. In the mid-2000s property was yielding 8-10 per cent, but today it is more like 4-5 per cent.

“Maybe interest rates are on the way up again, so the spread [above the base interest rate] for owning illiquid assets should be maintained. This means we would need to see prices fall.”

Mr Brookes cited the Fidelity Special Situations fund – the top holding in four of the seven Cazenove multi-manager portfolios – and the Majedie UK Equity and Franklin UK Mid Cap funds as products he holds with a significant exposure to equities linked to the property sector.

“This area seems to be quite bubbly at the moment,” he said.