A Conservative victory in May’s general election signals continued buoyancy in the UK property market.
Property’s popularity among UK investors saw it knock the Investment Association UK Equity Income sector off the top spot in February, making it the best-selling sector, with net retail sales of £304m.
Sales of property funds have slowed since then, according to recent figures from the Investment Association. It reports net retail sales in the Property sector of £265m in April, down from £294m in March.
But it has seen strong inflows in each month of the year to April 2015, which few other sectors can boast.
There are 44 open-ended funds in the IA Property sector. Property investment trusts come under several Association of Investment Companies (AIC) sectors, including IT Property Direct UK and IT Property Specialist.
According to data from the AIC on investment trust purchases via adviser platforms, the IT Property Direct UK sector has risen in popularity for three consecutive quarters, accounting for 9 per cent of investment trust purchases in the first quarter of 2015.
Richard Levis, global real estate analyst at Aviva Investors, says: “UK commercial real estate returns remained strong in the first quarter of 2015, with yields continuing to fall as rental growth became firmly established. But the pace of capital growth slowed.
“Total returns were 2.9 per cent in the first quarter, down from 4.1 per cent in the fourth quarter of 2014, according to the MSCI IPD quarterly index.”
Mr Levis forecasts that property demand will remain strong, noting a narrowing of the pricing gap between prime and secondary assets.
Phil Tily, head of IPD UK and Ireland at MSCI, agrees the number of transactions slowed in the first three months of this year.
“Now I suspect that’s nothing to do with anyone’s appetite for real estate,” he remarks. “I think that’s simply a case of shortage of supply of property coming onto the marketplace.
“In terms of investment volumes, round the back of last year we were seeing levels in monetary terms getting close to where they were in 2006-2007, so the appetite for real estate is evident in those statistics.”
Investors in open-ended funds will have seen particularly impressive returns over the past five years, data from FE Analytics shows. Over the five years to June 9 2015, the best-performing fund, the Aberdeen Property Share fund, delivered 132.06 per cent, while the sector average over that period was 44.69 per cent. In the past 12 months returns are slightly muted, with the sector generating an average 8.94 per cent.
Mr Levis suggests: “Real estate is likely to remain attractively priced relative to other asset classes over the next 12-18 months.
“Given the weight of current demand for UK real estate, further yield-driven capital growth looks probable in the near term, with good secondary and regional assets likely to perform especially well.
“We anticipate further rental growth as occupier markets strengthen and vacancy rates continue to fall.”
THE PICKS
Premier Pan European Property
Alex Ross’ £299.2m fund aims to provide income and capital growth from a portfolio that invests in European property company shares. It has 48.4 per cent in the UK, 17.9 per cent allocated to Germany, 13.3 per cent in France and 5.6 per cent of the fund exposed to Sweden. The manager has clocked up several years of outperformance, with the fund sitting in the top quartile of the Investment Association Property sector, according to FE Analytics. Over five years to June 10, the fund returned 111.16 per cent to investors, against the sector average of 44.26 per cent.
Standard Life Investments Property Income Trust
This £245m fund from Standard Life sits in the investment trust Property Direct UK sector and is managed by Jason Baggaley. He has steered the trust to deliver top-quartile returns over one, three, five and 10 years, and it is a member of the Investment Adviser 100 Club 2014. In the five years to June 10 it delivered a 95.20 per cent return, beating the peer group average of 42.27 per cent.
EDITOR’S PICK
Henderson Horizon Pan European Property Equities
Another Investment Adviser 100 Club 2014 member, this €531.88m fund is run by Guy Barnard. He invests at least 75 per cent of the fund’s assets in companies or real estate investment trusts investing in European property. The portfolio is 48.3 per cent exposed to the UK, with 14.6 per cent allocated to the Netherlands and 11.4 per cent in Germany. The fund has outperformed the IA Property sector over the long term and in the three years to June 10 returned an impressive 75.12 per cent, where the average for the sector was 30.80 per cent. The fund has maintained its top-quartile performance in the past year, delivering a respectable 10.99 per cent, against the sector’s 8.62 per cent average return.
