UK property can still give shelter

There were concerns about property funds in the UK given they had performed extremely well for the previous three years due to extensive buying by overseas investors. This led some managers to reduce exposure to commercial property and diversify into more specialist property areas, such as retirement homes.

This sentiment was amplified when the UK voted to leave the EU, which led to significant outflows. This was partly due to sentiment but also broader liquidity issues post-referendum.

The reaction was not necessarily justified and caution was urged among those reviewing their property exposure. Investors should be wary of discounting property and should assess why they hold it in their portfolios – it can still be an attractive income play in a low-growth environment.

One of the reasons property has been an attractive asset class in the past is the consistent income return it delivers. Despite the turmoil, property continues to offer an attractive yield compared to fixed income and equity alternatives.

Unless there is a severe impact on economic activity and a rise in corporate defaults, property income levels overall are expected to be resilient. There are reservations about capital and rental income growth but, overall, it remains broadly positive.

Ignoring the initial overreaction, the medium- to long-term impact on both the economy and the property market is hard to gauge. Some negative impact on GDP and downward pressure on capital values is expected.

It is possible that locations historically favoured by overseas investors, including London, may experience more pressure. But, conversely, property investments in the UK are likely to continue to attract overseas buyers given that property investments are cheaper for foreign investors as a result of the falling currency.

Investors should also not discount the impact of corporate tax rates on multinationals’ locations. The current rate in the UK is 20 per cent, lower than most of our competitors in Europe, and may fall even further.

Investors understand these factors and will continue to seek shelter in UK property. While the return profile of property will be lower, relative to equities it is still likely to perform better.

Property funds in the UK have performed well for the past three years partly due to buying by overseas investors but also supported by a general search for yield. Still, it is important to maintain a diversified property exposure. Those concerned about the core commercial sector should consider specialist property plays that offer an alternative route into the asset class.

There are a variety of property types, such as industrial warehouses and healthcare, which all offer different structural drivers of return.

One example is large-scale distribution centres. Internet shopping continues to take market share from high street retailers and we expect this segment of the market to prosper. This asset class is likely to be a continued beneficiary from changes in shopping habits regardless of the outcome of negotiations to leave the EU.

Overall, property still has a place in diversified portfolios despite the fallout from Brexit. In a world starved of income, the potential yield on offer makes it an attractive asset class. While questions remain about future capital values, investors need to ensure their investment time horizons match the risks involved in this relatively illiquid asset.

Nathan Sweeney is senior investment manager at Architas