Alternative options to avoid the property boom

Property was severely impacted during the depths of the financial crisis so price recovery was inevitable, but the bandwagon has now, arguably, been well and truly jumped on with the IMA Property sector topping the sales charts in May.

Beyond this, fund selectors have been increasingly bullish on the sector with multi-managers, including JPMorgan Asset Management’s Tony Lanning, increasing exposure, while Jupiter’s John Chatfeild-Roberts bought into direct commercial property for the first time in a decade in April after backing the Mayfair Capital Commercial Property fund.

Broadening horizons

So given many investors have piled into property, those seeking some exposure may be wise to look to parts of the sector which have not experienced such huge support already.

Rob Burdett, co-head of multi-manager at F&C Investments, says it is now “very” important to diversify property holdings.

“Closed ended funds are seeing their share prices trade at premiums to the net value of their assets and their open-ended counterparts have cash drag.”

The issue with open-ended property funds, as Mr Burdett points out, is that to ensure they have daily liquidity for investors wishing to sell, they need to hold cash because they would be unable to divest holdings at will if they invest in physical property.

The multi-manager added that “industry grandees”, such as commercial property millionaire Nick Leslau, “are selling”, which is perhaps another consideration for investors.

Infrastructure

One area many investors have flocked to is infrastructure as this offers a different flavour of property exposure. Such trusts often invest in public-private partnerships – a mix of government and private cash – to build projects including schools and hospitals.

The attraction to investors is working with the public sector, which engages in long-term contracts that often include some form of inflation protection. However, because of this, the shares in infrastructure investment trusts now trade at significant premiums to the value of their portfolios.

John Laing Infrastructure’s shares trade at nearly a 12 per cent premium to the net asset value of the portfolio while Hicl’s shares are on a 15.5 per cent premium, according to data from the Association of Investment Companies.

Investment trust analyst Paul Locke, of Westhouse Securities, also recently warned these trusts had been “relatively untested” when interest rates and inflation are rising so investors should acknowledge this.

Alternative property

In terms of other alternative property holdings, Mr Burdett has backed Medicx, an investment trust which aims to deliver returns by securing rental income and capital growth from the ownership of a portfolio of purpose-built, primary healthcare properties in the UK. The fund has returned 56.2 per cent since launch in 2006.

The manager also backs the £321m Darwin Leisure Property, an open-ended, Guernsey incorporated unregulated collective investment scheme which invests in leisure parks. The fund launched in January 2008 and has a portfolio of UK-based holiday accommodation. It aims to provide investors with income and some capital growth by improving the sites it owns.

Apollo Multi Asset Management’s Ryan Hughes says one of his funds’ best-performing holdings had been the Guernsey-incorporated Macau Property Opportunities, an investment trust listed on the London Stock Exchange, held in three of his funds for a number of years.

He said the fund, which targets niche developments in Macau and the Western Pearl River Delta, had been “our most successful investment by some margin”.

Reits

If investors are looking for domestically domiciled funds, real estate investment trusts could be an option.

In May, Rathbone Unit Trust Management’s David Coombs added property to his Multi Asset Total Return fund for the first time by backing the £238.9m Schroders Real Estate Investment Trust, a member of the Investment Adviser 100 Club of top-performing funds. At present the trust is trading at a marginal premium of 3 per cent, making it a less expensive investment than something like infrastructure.

Beyond bricks and mortar

Alternatively, some funds in the IMA Property sector invest in property-related shares rather than buying bricks and mortar.

The Henderson Horizon Pan European Property Equities fund – another member of the Investment Adviser 100 Club - is one such fund. Patrick Sumner has managed the fund since launch while Guy Barnard joined in September 2010. Since launch, the fund has delivered 62.6 per cent, less than its FTSE Epra Nareit Developed Europe index’s 74.3 per cent return but substantially more than the its peer group average.

Student accomodation

There are other alternative property sectors but advisers need to make sure they conduct strong due diligence for some of the more esoteric plays.

One property asset class which had become increasingly popular was student accommodation. While the pitch for this asset class usually mentions inevitable rent increases and ongoing demand – particularly in the major UK cities – some funds have had issues.

The Brandeaux Student Accommodation fund was due to list on the stockmarket this summer, but announced in July it had suspended such plans due to “adverse market conditions”. The company added its operations “remained unaffected” by the decision not to list stating that it would continue to run unimpeded.

The fund was previously suspended from trading in July 2013 due to concerns about liquidity. Brandeaux blamed the suspension on redemptions triggered by the FSA’s move in 2011 to ban the sale of unregulated products to retail investors.

Overseas property

Elsewhere, the Marbella Resort and Spa fund had hoped to raise £40m as part of a scheme to build a spa resort in the Spanish holiday destination, but after nearly a year of fundraising it had accrued just more than £1.1m.

This prompted wrap platform Novia, which the fund was listed on, to suspend access until the situation had become clearer. The company behind the fund said it expected to receive funding from Europe and local government in Spain.

Understanding risk

The main thing, therefore, when searching alternative property funds is to make sure clients understand the risks of listed vehicles where this is an option, and that advisers understand what protections are afforded to their clients in funds based in jurisdictions such as Guernsey should things go awry.

And if nothing other than plain vanilla will do, Apollo’s Mr Hughes said he was more relaxed about the need to diversify, claiming property funds which failed during the crisis were “non-core funds where people tried to be too clever”.

“Today managers of large, well run UK commercial property funds have learned a lot and are much better placed to withstand another property crisis,” he said.