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Darius McDermott: Property investing – caveat emptor

darius mcdermottOut of favour since the Brexit vote, but is it time to buy into bricks and mortar?

Janus Henderson’s announcement that it is moving its open-ended UK Property fund from bid to offer pricing to a fixed price has brought property investments back into the spotlight after a period of quiet.

Since the EU referendum in June 2016 – which forced most open-ended property funds to gate temporarily and led property investment trusts to trade on huge discounts – many investors have been wary of the asset class: mainly due to the ongoing uncertainty over Brexit.

This uncertainty has, in turn, led to volatility of flows and caused pricing, on the Janus Henderson fund at least, to move from bid to offer and back again almost 20 times.

Swing pricing has never been easy to explain to clients wanting to buy or sell units in a fund, and I think this change in pricing approach should be welcomed. Not only is it more transparent, but it should help remind investors that property investing should be seen as being very long-term.

A quick recap
Let us remind ourselves about the two key points of property investment. First, property is an illiquid asset. It really should not come as a surprise to anyone that it takes time to buy and sell property. Ask anyone who has moved house. Would they fork out on solicitor fees, mortgage fees and stamp duty to buy a house one day to simply sell the next? Would they expect to be able to do so? No. So investors should have the same expectations about property investments.

Second, property has two attributes when held in a portfolio: diversification and yield. It is not meant to be a tactical investment that will make anyone rich quick.

Time to buy?
Commercial property has a close link to GDP and, with the Bank of England warning there is a one-in-four chance of recession even if Brexit turns out OK, I wouldn’t suggest today is the day to bet the house on a property investment (pardon the very bad pun). Certainly, in our managed portfolios, we have no generalist property exposure.

However, there are some areas of value. While most funds and trusts have the majority of their assets in retail, commercial and office space, the “other” bucket has been growing steadily. And it is here that opportunities may exist.

From warehouses to care homes, private hospitals to student accommodation, some longer-term themes offering more defensive options have appeared in recent years.

It’s not news that UK high street retailers have been struggling.  Jitters over Brexit, business rate hikes and the rise of online retailers have all taken their toll, leading to deteriorating trading conditions and several high-profile CVAs. But even online retailers need some bricks and mortar – usually in the form of “last-mile” warehousing.

Improving living conditions and medical advances are also increasing longevity. The UN predicts that the number of people aged over 65 will increase from 8.3 per cent of the global population in 2015 to 16.2 per cent by 2050. As we live longer, but perhaps need more looking after, care homes are another growing opportunity. Private hospitals are another beneficiary of this trend, as we become more willing to pay up for some of our healthcare requirements.

And all the time the UK can offer world-class universities and education, student accommodation will also thrive. Overseas students have parents willing to pay for goodquality accommodation and, as a country experiencing a long-term housing shortage, demand simply outstrips supply.

In the coming year – once Brexit is finally sorted or we at least have some clarity – I expect more generalist opportunities to emerge once again. For long-term investors, going in with their eyes open, this may be a good entry point.

Property choices
When it comes to generalist property investment funds, the choice is perhaps wider than many imagine. From residential to long-lease, property shares to bricks and mortar, the range is quite wide. Here are five of my favourites:

1. TM Home Investor
One of a kind, this is the only residential property fund available to UK investors. The equivalent of a buy-to-let fund, it invests in two- to three-bedroom properties all over the UK.

2. TIME: Commercial
This fund invests in commercial freehold properties and ground rents with long leases – on average 60 years. It has a target yield of 4 per cent and 86 per cent of holdings are linked to inflation.

3. Janus Henderson UK Property
Quality tenants have always been key for this fund. Vacancy rates are just 6.6 per cent currently and the number of tenancies is in excess of 581 (spread across 84 properties), giving good diversification.

4. TR Property Investment Trust
For those who prefer a closed-ended structure, this trust is worth a look. It invests mainly in pan-European property shares but can also invest in UK direct property (currently 8.4 per cent of the portfolio).

5. Premier Pan European Property Share
This fund invests in both residential and commercial property-related shares listed in the UK and Europe. It has a yield of 3.75 per cent.

Darius McDermott is managing director at Chelsea Financial Services

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