Is property heading for a fall?


The Queen’s Speech last month saw the next step in the Conservative pledge to expand the Right-to-Buy scheme. But there are concerns the move could compound the UK’s housing crisis and put pressure on property investing returns.

The Tory pledge will see the right to buy homes at a discount extended to social housing tenants, where previously it has only been available to council tenants.

The discount is up to £104,000 in London, and £78,000 outside the capital.

While ministers say the money from sales will be ploughed back into new housing developments, Government data shows for the 26,185 homes sold under the scheme since 2012, just 2,712 new homes are being built.

With prices in the UK booming in recent years in both residential and commercial property, concerns remain around pricing and supply.

Standard Life Investments investment director of real estate Mark Meiklejon says: “We certainly don’t think property is in a bubble but there is always the danger there could be an overshoot in the weight of money chasing that relatively limited availability of good quality assets.”

Aberdeen Asset Management glo-bal head of property research and strategy Andrew Allen says: “There are issues about supply, not on the physical volume of new companies looking for space but of space. There aren’t lots of shopping centres being built or houses, office blocks, industrial estates, so the supply side is relatively constrained.”

He says for this reason managers need to be cautious about pricing, particularly in areas such as central London and the South-east.

Multi-manager Architas chief investment officer Caspar Rock says the Government is doing little to help these supply-side issues, with most of the pre-election pledges being around demand issues such as the Right to Buy scheme. However, he says any moves on easing planning laws, particularly on brownfield sites, and moves on property companies that are sitting on landbanks would help the supply issue.

For this reason some fund managers are focused on quality, stable assets rather than higher growth, riskier assets.

One such manager is TIAA Henderson Real Estate head of UK balanced funds and Henderson UK Property Oeic manager Ainslie McLennan. She is focused on primary, good quality properties in good locations with reliable tenants.

“If you lose a tenant in a good location and good quality building the chance is much higher of re-letting it than in a secondary location in a fragile occupier market.”

Worries about pricing have not stopped retail investors pouring their money into the sector. Last year the IA Property sector saw £3.82bn of inflows.

Inflows have continued to be steady this year, with the first three months alone seeing £1.1bn of net retail sales, according to IA data. The IA Property sector has also been among the top three most popular investment sectors for retail sales every month bar one for the past two years, ranking in third place last month behind targeted absolute return and Europe ex-UK.

But those flows are not expected to continue at the same pace.

Property managers are preparing themselves for outflows once something changes in the wider market – be that an interest rate rise or a slowdown of quantitative easing.

While a sharp increase in interest rates by the Bank of England is not expected, it would lead to bond yields improving and therefore looking more attractive in comparison with property.

Meiklejon says while at the moment property is a little expensive on an absolute basis compared with historical values, relative to other asset classes it offers good value but a rise in bond yields could hit that.

It is for this reason McLennan says she is very conscious of liquidity, having 20 per cent or more in cash at any one time while also having a higher Reit allocation than would be ideal to bring more liquidity into the portfolio. The team then groups assets into liquidity groups, knowing which they can sell off quickly if they need to.

Most managers are not expecting interest rates to rise any time soon and, when they do, increases are likely to move by 25 basis points each time. This will mean bond yields will creep up gradually. But managers say even a sharp change to rates may not cause a property exodus.

Meiklejon says: “An extreme rise would obviously have a major impact on relative pricing against other investment opportunities but the margin is so wide there is a fair bit of room in that for rates to tick up slowly and not affect the asset class.”