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Beyond prime property

As investors continue their return to property, are there opportunities to be found outside London’s prime assets, or even away from bricks and mortar altogether?

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As investors continue their return to property, are there opportunities to be found outside London’s prime assets, or even away from bricks and mortar altogether?

April saw property funds regain further ground, with the IMA Property sector ranked the 10th most popular sector for the month after it recorded £98m in net retail sales, compared with £33m for March 2013.

Ignis property director Gary Hutcheson says the return to property comes as the asset has began once again to fulfill its traditional function as a diversifier.

He says: “In the current environment we are left in a position where equity markets are very volatile and gilt markets provide negative real returns.

“Property is sitting amidst this with an income of 6 per cent plus, and providing inflation protection with this income too. It looks like property is going back to being a good diversifier and providing investors with a good income return.”

However as demand for property increases, some managers argue that prime locations and assets are becoming expensive and look instead to a range of alternative property investments.

Kames Capital chief investment officer Stephen Jones says: “There is a move away from the very expensive safe haven assets of central London and there is beginning to be some value in sensibly stock picked and assessed second tier, second city properties around the UK.”

Standard Life Investments manager Jason Baggaley adds the long-dated income commonly associated with prime assets is expensive.

The manager of the SLI Property Income Trust is now looking to short-dated leases in areas where there is low supply of good quality accommodation, such as Staines, Edinburgh, Glasgow and Manchester.

He says: “I also like short leases in these areas because I do not think this supply issue will change in the near future – there is very little building going on.”

Schroders head of property research Mark Callender highlights a potential future opportunity to invest in clusters of property occupied by the technology, media and telecoms (TMT) sector across Europe.

Callender gives examples of these “tech-clusters” in fringe office locations in big cities such as London, while others can be found in university cities including Cambridge and Reading.

According to Callender, the TMT sector shows signs of becoming a future leader for economic growth in Europe, whilst already showing visible benefits for property.

He says: “The growth of the TMT sector has been an important driver behind the fall in vacancy and recovery in office rents in certain cities such as Cambridge, Karlsruhe, London’s West End and Munich since 2010.”

However Callender does point out that tech-cluster property may not be suited to investors who favour the security and quality of prime assets.

He says: “The real attraction of fringe office locations is that while rental growth may be negligible, investors who have good property management skills and who can keep their buildings fully occupied, are likely to achieve yields which are 100-300 bps higher than in the adjacent central business district.”

Aberdeen Asset Management investment manager Sanjeet Mangat puts forward the alternative argument for investing in property shares, as a way to gain liquid exposure in what is a traditionally illiquid asset.

She says: “Liquidity is key. Markets have been volatile and people are quite keen to know that they can get their money in and out of the market quickly. Monthly valuations of standing buildings are not as liquid a market compared to a NAV to market each day.”

The Aberdeen Property Shares fund invests in listed property companies as well as companies that derive a significant proportion of their profit for revenues from property.

Mangat says the fund’s 24 holdings, “each with hundreds of buildings in their own portfolios”, create huge diviersity while avoiding the “material single asset risk” that comes with physical property.

She adds: “London and the south-east remain more resilient and show more potential for long-term growth. Our portfolio is concentrated on prime assets here.”

Other fund managers are also continuing to put prime assets first. The £949m Henderson UK Property fund co-manager Marcus Langlands Pearse says his portfolio will “always focus on the South East”, because of the liquidity in that area of the market.

However he acknowledges opportunities are emerging within secondary property. He says: “Fundamentally good properties in the regions or with shorter leases are increasingly being seen as undervalued.”

Langlands Pearse adds he has recently acquired assets outside typical prime locations including a cinema in central Cardiff, a factory in the midlands and is also considering the purchase of property in Scotland.

Murphy Financial associate partner Adrian Murphy argues the case for sticking to bricks and mortar property funds. He says: “As much as property company shares are exposed to property, you are still ultimately driven by the market sentiment rather than income and valuations.

“That is no use for us, it is totally against why we would look to put money into property funds in the first place.”

Cube Financial Planning co-founder Mike Godfrey uses “two core themes” of direct UK commercial and REITs when investing in property. He says: “We have property as a diversifier.

“We believe this combination, with the right proportions, works well as an alternative investment as part of a portfolio.”

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