On 1 September 2018, the Investment Association will split its property sector into two.
The 49 funds will be rearranged into either 'UK Direct Property' or 'Property Other'.
The UK Direct Property sector will include funds investing in physical commercial and residential properties, student accommodation, leisure and healthcare.
The Property Other sector will accommodate everything else. It will still be a vast mix of funds investing in different geographies - but it is a start.
My best in class this week will soon have its home in the IA Property Other sector.
Premier Pan European Property Shares has been managed by Alex Ross since 2005. The target is twofold: to generate income (currently 3.6 per cent), while also providing an attractive level of growth.
Mr Ross' process is based on a proprietary and quality-based stock modelling system, which is overlaid onto all the stock ideas, alongside a valuation criterion of price to prospective net asset value (NAV), and price to cash flow metrics.
UK property companies, especially those with a London focus, are on a steep discount to NAV. But this could be an opportunity if Brexit turns out better than expected.The process serves two main purposes. First, it will highlight the best in class companies with proven track records.
Then, it will find the stocks that can improve and enhance their properties, moving them up the quality scale. Both of these elements will offer a level of protection should macro factors become negative.
The fund's lack of constraints allow Mr Ross to take large bets if he sees opportunities.
This flexibility can lead to periods where the fund lags its benchmark. However, over the long-term the manager has demonstrated lower volatility, better Sharpe ratios and fewer down periods than his benchmark over five and 10-year periods.
Brexit is, of course, a consideration at the moment.
UK property companies, especially those with a London focus, are on a steep discount to NAV. But this could be an opportunity if Brexit turns out better than expected.
Mr Ross says that the management teams of London-focused companies are very cognisant of the risks and have been actively deleveraging and reducing their London exposure. Some have also been buying back their shares at the discounted price.
Europe is his main exposure currently and Germany has been his favourite area for five years or so.
There is a supply/demand imbalance there and a chronic shortfall in urban locations, which means rents are growing strongly.
He also likes the Paris office market. Rents have been flat for the past decade but have picked up in the 18 months since President Emmanuel Macron came into power.
More confidence among business and consumers, and a tight planning system means supply is still catching up.
Mr Ross also thinks Madrid and Barcelona office space is attractive.
Rents fell peak-to-trough by about 40 per cent after the global financial crisis but last year finally started to pick up: nothing has been built for a decade and excess supply is being used, so rent is increasing.
All office investments will typically be Grade A quality and based in Europe's leading capital cities, as they exhibit the best tenant demand and rental growth opportunities. This gives the holdings a strong level of inflation protection.
In the retail space, he will often target so-called ‘destination centres’, with a combination of shops, restaurants and experiences (such as cinemas) that appeal to multiple demographics.
Looking at property alternatives, he thinks there is an opportunity for industrials specialising in last-minute logistics.
He also likes student accommodation, citing Unite Group – which focuses on leading university towns – as an example holding in the UK, as well as self-storage and healthcare, where demographics are leading the market higher.
Historically there has been the perception that rising interest rates are bad for the property sector, but Mr Ross says that isn't strictly true and, as long as rises are gradual it shouldn't be a problem. When interest rates are rising, the economy is generally healthy.
Most of debt financing for companies is fixed for the medium term, so borrowing costs will still remain cheap. Good earnings growth should also feed through and rents should rise.
The risk is if there is fiscal error and markets lose faith in central bankers.
With pretty resilient income streams, growth potential, inflation hedging characteristics, low-cost fixed financing and consolidation potential, this is still an interesting asset class.
The threats, as for most assets classes right now, are that stock values are high and there is uncertainty over the economic and political outlook.
If you are looking for diversification and/or another income element for a portfolio, this could be a good option.
Darius McDermott is managing director of FundCalibre
