InvestmentsJun 11 2020

Property as an alternative income investment

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Property as an alternative income investment

The persistently low bond yields of recent times prompted many investors to invest in alternative income assets, including a number of investment trusts that invest in niche sectors of the property market, as alternatives to bonds and traditional equities.

Among the sectors to have found favour with investors are student property, health centres and infrastructure.

The income from assets such as student property and some infrastructure investments is ultimately derived from the government, potentially placing some of those income streams into the very low risk category alongside government bonds, but with a much higher yield. 

Neil Birrell, chief investment officer at Premier Miton, says: “We also invest in some of the more niche property sectors, such as student housing, but I am starting to worry that a bubble might be developing there as such a lot of it has been built in recent years.

"My children are at Newcastle University and I have noticed that a huge amount of specialist student housing has been built in that area and a lot of it is empty.”

Property investment has always been about income, but the relative merits of this income in a low interest rate environment cannot be ignored richard Shepherd Cross, Mattioli Woods

Matthew Norris, manager of the Gravis UK listed property fund says that while there are a number of different funds investing in student property, the quality of the assets owned by each student housing property fund varies widely. 

Richard Shepherd Cross, managing director of Custodian Capital, the fund management division of Mattioli Woods says: “Property investment has always been about income, but the relative merits of this income in a low interest rate environment cannot be ignored.

"The current margin of property yields to 10-year gilts is 6 per cent. This is the widest margin ever recorded.”

Infrastructure well-placed

Charlie Parker, managing director at Albemarle Street Partners, a discretionary fund management firm, believes funds that invest in infrastructure, where the revenue comes from the government, are “well placed” for the economic environment with which investors are currently faced.

He says: “We do believe that listed infrastructure funds, the close relative of property funds, are well-placed.

"We believe that governments will progressively increase infrastructure spending in the advanced world in the years ahead as they seek to inflate away debt.

"Another plus for infrastructure funds is where governments pay inflation linked 'rent'. Given the potential for inflation to pick up, this is a valuable attribute.

"With this in mind, we look for property-like returns from vehicles where the underlying leases and income streams are linked to fundamental building blocks of society effectively underwritten by the government; such as power stations, energy infrastructure and health facilities.

"In terms of residential property we do not have a strong view except to say that we believe that interest rates in the UK will remain lower for longer as a result of the Covid crisis and this should provide some continuing support in an area where valuations remain out of step with earnings.”

Mr Norris says that while low bond yields have helped the specialist investment trusts, there are broader themes at play.

He says: “I think in future, general property company Reits such as British Land or Land Securities will struggle in future because the exposure they have is to retail and office space. The more specialist property investment trusts are exposed to long-term trends such as healthcare facilities, self storage units and warehouses.”

Michael Artbuthnot, chief executive of specialist property investment firm Catalyst says property investors should expect returns of about 8 per cent over the coming year, divided roughly evenly between income and capital growth.  

Paul Derrien, investment director at Canaccord Genuity Wealth Management believes that the present elevated levels of economic uncertainty mean property as an asset class that is sensitive to the wider economy, is much riskier now. 

He says: “There remain tough times ahead in this sector. Newspapers are full of renters looking for reduced rent costs, whether that is high street retailers, Travelodge, or restaurants.

"Many will not see out the pandemic once the life support is taken away, so investors need to be careful. Despite this, there are decent discounts in the smaller Real Estate Investment Trust (REIT) market where share prices have fallen, already predicting reduced income.

"At these low prices, these funds can be sensible income sources for the future. Do your homework on the properties in their portfolios and do not see these as alternatives to bonds, or as risk diversifiers.” 

Property as diversifier?

William Buckhurst, head of fund research and investment director at Vermeer Partners says: “In normal circumstances, property is a good diversifier to a portfolio of equities and bonds in terms of being able to provide relatively stable levels of income, even during times of an economic slowdown.

"The exception to that rule – and in our view close to what could be called a “black swan” event – is the current Covid-19 pandemic where many tenants have been unable or unwilling to pay their rents.

"This has been felt particularly hard in the office, retail and hospitality sectors. However, well-managed property funds with decent cash reserves that do not employ excessive levels of leverage will be able to ride out this income shortfall during what should be a relatively short-lived dislocation. 

"There may be longer-term consequences for office space where corporate tenants elect to review  the amount of space they require to house their workforce.

"It strikes us that one area that would be particularly hard hit is that of Disaster Recovery Sites – the success that we have all experienced in working from home suggests that 'back-up' offices are no longer required and the owners of these assets may find they are worth less in years to come."