Property remains a long-term source of inflation protection

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Hunt for income - November 2013

In today’s low-interest-rate environment, investors are considering diversifying into property funds as a way to boost their income.

With UK 10-year gilts currently yielding roughly 2.6 per cent, property funds look attractive as they can offer upwards of 4 per cent, with less of the volatility of equities.

As the Bank of England has pledged not to raise the bank rate until unemployment falls to 7 per cent, which they forecast will not happen until the end of 2016, this trend shows no signs of abating as many multi-managers are in the “lower for longer” camp on interest rates.

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Meanwhile, the UK economy has been going from strength to strength, with a growth in gross domestic product of 0.6 per cent in the second quarter, a positive factor for commercial property which is starting to see prices move back towards their pre-crisis levels.

Justin Onuekwusi, multi-asset manager at Legal & General Investment Management, has made property funds one of the key components in the L&G’s recently launched multi-asset, risk targeted range.

“In this low yield world, with bonds [yields] at such low levels, investors are finding other ways to get income, and property is one of those areas,” he says. “We think the yield it gives for the risk you take is very attractive... and it’s a great diversifier.”

The manager invests in the asset class in-house through L&G’s £920.7m property fund, which at the end of August offered a yield of 2.9 per cent.

But he adds that the main issue he has with property is its illiquidity. “We typically won’t put more than 10 per cent in our portfolios simply because of the liquidity - if it was not for that I would have more in my portfolio,” he explains.

Furthermore, Mr Onuekwusi points out that the cost of getting in and out of property could be as much as 6-7 per cent, which has to be factored in to the decision to invest.

“Given the transaction costs it [property] is still sort of attractive but the key is you have to be holding it for the long term, I won’t go in and out of property in the short term because of that cost,” he says. While the manager is keen on the asset class in general, he prefers to invest in the asset class through open-ended funds, as he doesn’t think Reits (real estate investment trusts) are an ideal way to gain exposure, because they experience higher volatility than direct property as they are more strongly correlated with equities.

Simon Evan-Cook, who manages Premier Asset Management’s multi-asset funds, has also become increasingly positive on property.

“We have not held open-ended property [previously] but in the past few months we have gone from having nothing to 7-8 per cent in the income funds,” the manager says. He adds that property now accounts for 13 per cent of the £223.6m Multi Asset Distribution fund.