The themes behind property investing

This article is part of
Multi-Asset - January 2014

Property has been significantly out of favour with investors since the financial crisis and credit crunch – but that seems to have changed in the past year.

Data from the IPD UK Monthly Property index for December shows that UK commercial property produced a return of 10.9 per cent in 2013, which is the strongest annual performance since 2010 and well ahead of the consensus forecast of 8.6 per cent.

Phil Tily, executive director and head of UK and Ireland at IPD, says: “At the start of 2013, few would have expected the year to end with such a flurry – but sentiment has improved drastically along with economic performance. It’s safe to say that 2013 was the year when we saw a marked turnaround in the performance of UK commercial real estate.

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“Critically, this has increased confidence in higher yielding and heavily discounted regional assets, that has allowed growth finally to spread out of the capital as investors look for improved income returns and value add opportunities.”

This view seems to be shared by multi-asset managers with many of them starting to become more positive on the asset class.

Rob Burdett, co-head of multi-manager at F&C Investments, notes they are starting the year with a neutral view on property, as while 2013 provided a pretty reasonable return from UK bricks and mortar as a whole “that masks quite a different picture”.

He adds: “You could have done a lot better than that in certain areas of the market and a lot worse if you were in an international property equity portfolio. We like to have a blend of assets within property. We do own a bricks and mortar fund from Swip. It is one of the bigger funds, but it’s got a well-balanced portfolio and never closed its doors to investors in the credit crunch. We think that team will continue to prosper post-merger with Aberdeen.

“But our preference has been for property proxies, so in this regard, we are looking at things like Medix, a listed property company that invests in NHS doctor surgeries. We also have a holding in a listed student accommodation business from GCP.”

Justin Onuekwusi, multi-asset fund manager at Legal & General Investment Management, adds that the fundamentals are very favourable to property at the moment, and therefore, within his multi-index funds he has the highest weighting he can have.

“I prefer direct property over Reits (Real Estate Investment Trusts) because Reits in the short term have a lot of equity risk, however direct property really performs like the underlying actual properties. Economic growth in the UK is actually looking reasonably good and that is always a good backdrop for commercial property.”

Other positive factors cited by Mr Onuekwusi include increased credit availability for people who want to buy property and the valuation case remains strong compared to an asset class such as bonds.

“Price momentum in property is definitely strengthening, you’re starting to see rents rise outside of the prime rental areas like London and, secondly, you’re also starting to see risk appetite improving in the secondary sector. So it is a very useful asset class to have in a multi-asset context.”