Property funds were a hot topic in 2016. With more than £1bn worth of retail money withdrawn in June last year following the EU referendum, a number of funds were forced to suspend redemptions for several months.
March 2017 finally saw a reversal, with the Investment Association (IA) Property sector recording £52m net retail sales after more than six months of continuing outflows.
The group is quite mixed in the sense it is comprised of funds investing directly into physical assets (bricks-and-mortar offerings) and products investing in property equity (listed property). These vehicles behave quite differently, especially in the short term.
Of the 45 funds in the group (excluding feeder funds), there are 19 direct property products and 26 listed property funds. The bricks-and-mortar offerings mainly invest in UK commercial real estate, while the listed property funds are for the most part global, with a few investing regionally. This explains the great diversity in returns within the sector for the year ending April 30 2017.
Direct property vehicles have returned 3.3 per cent over the period, while listed property portfolios have gained 11.8 per cent. This is easily explained by the regional bias within the two groups and the impact the Brexit vote had on them.
First, global real estate investment trusts (Reits) have benefited from a weaker sterling, which saw returns jump from June 24 onwards. Second, they have not experienced the massive redemptions seen with UK property funds. In comparison, UK Reits suffered a 22 per cent drawdown within three days in June 2016 and are yet to recover from these losses.
The growth of listed real estate funds has been so significant over the years – including during the financial crisis – that it prompted S&P Dow Jones Indices and MSCI to separate Real Estate from the Financials category in its global classification system as of September 2016.
The split stresses the importance of property in investors’ portfolios and its unique investment characteristics.
As of May 2016, Asia-Pacific accounts for the largest regional weight to real estate in the MSCI AC World index, while Europe represents the smallest allocation as a total of the whole equity market. However, the quality of these companies are often poor and fund managers are better off picking firms in the US, Australia, UK and Europe.
Listed real estate companies today are healthier than prior to the financial crisis. They have reduced leverage and are not as dependent on banks as they used to be to raise capital. This stabilisation and diversification in the capital structure has been led by European Reits.
A common question among investors is whether listed property is a good proxy for direct property, as it is often believed these behave more like equities. According to the European Public Real Estate Association: “The correlation with direct real estate overtakes that of the correlation with the equity market after one year and continues to increase thereafter.”
Hence, both have a place in a multi-asset portfolio. The asset class is also appealing for its income-generating nature, which is even more relevant in today’s low-growth world.
Amandine Thierree is an analyst at FE
THE PICKS
L&G UK Property
This £2.6bn fund launched in 2014 and is managed by Michael Barrie and Matt Jarvis. The portfolio aims to provide a combination of income and growth by investing mainly in commercial property, with at least 80 per cent invested in UK commercial properties. The vehicle appeared in the IA 100 Club for the first time in 2016, going on to win the category, as it impressed despite the sector’s volatility last summer. The five-year return to May 17 of 42.1 per cent slightly lags the IA Property sector average of 50.3 per cent, in sterling terms, data from FE shows .
Picton Property Income
Established in 2005, this investment trust had net assets of £442m as of March 31 2017, and aims to provide an attractive level of income alongside the potential for capital growth. It invests in commercial property across the UK and has a portfolio of roughly 53 assets in the office, industrial, retail and leisure sectors. Performance has been consistent, with the investment company outperforming the AIC Property – Direct UK sector average across all-time periods. The five-year return of 198 per cent, in sterling terms, is more than double the sector average of 82.9 per cent, data from FE shows. The largest sector weighting is to industrials at 40.1 per cent of the portfolio.
EDITOR’S PICK
Fidelity Global Property
Launched in 2006, this £206m fund is managed by Dirk Philippa with the aim of providing income and long-term capital growth. The manager invests in property securities that have an attractive valuation, with the team looking for valuation anomalies relative to history, peers or other regions. The fund has delivered steady returns ranking in the top quartile of the IA Property sector across one-, three-, five- and 10-year periods to May 17. Its five-year return of 81.4 per cent, in sterling terms, compares favourably with the sector average of 50.3 per cent. The portfolio’s largest sector weighting is to residential at 31.1 per cent, while the largest regional allocation is to North America at 55.4 per cent.
