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Property Special Report: Home on the range

A voracious appetite for all things property has brought a surge in the number of funds specialising in what was once a niche investment.

Commercial property, particularly in the UK, is still the most accessible option but more funds are investing in alternative assets, such as US shopping malls, leisure centres and student accommodation.

The globalisation of property as an asset class has seen a lot of fund launches in the last two years.

Standard Life’s £1.3bn select property fund, which was set up in autumn 2005, has entered into a joint venture with Panattoni Development Company to develop a 50,000sq metre distribution warehouse in Lodz, Poland. The fund is also developing a second distribution warehouse facility in Plzen in the Czech Republic.

Andrew Jackson, the fund’s manager, says Central Europe is one of the most exciting property prospects for investors. He says: “These markets are ideally placed for two main reasons – they provide logistical operators with an axis to transport goods from manufacturing bases in Central and Eastern Europe to Western Europe, and serve as a distribution platform for goods traded between Northern and Southern Europe.”

He believes the global remit will allow the fund to overcome this year’s expected slowdown in the UK commercial market.

Standard Life Investments investment director for mutual and life funds Barry MacLennan says the fund has increased its exposure to US property companies, in particular, East Coast financial and business offices.

He says although most of the fund’s direct holdings remain in the UK, international property markets in North America, Europe and across Asia Pacific are all performing well.

He adds: “UK investors are still fascinated with property at home but it is our international outlook that will allow us to overcome any dips because the performance of property markets across the world does not correlate with each other.”

The £109m Schroder global property securities fund also goes further afield. Its manager Jim Rehlaender, says the best returns have been from Hong Kong, Italy and Singapore. Rehlaender says the direct property worldwide market remains strong but there is an expectation for returns to moderate this year.

New Star is setting up an international property fund focusing on direct commercial property in Western Europe, Central Europe, Japan and the rest of Asia.

The New Star fund claims to be the first FSA-authorised fund to provide UK retail investors with access to direct international commercial property.

It will aim to hold up to 80 per cent of its assets in bricks and mortar, with the remainder in international Reits, property shares and cash for liquidity purposes.

The fund is an onshore Oeic and will initially favour continental European and Asian markets where there are reckoned to be significant opportunities.

Managing director of UK retail sales and marketing Phil Wagstaff says the fund, which launches next month, has seen a positive reaction from intermediaries.

Within the UK, fears of a slowdown have not yet dampened investors’ appetite for the domestic market. Legal & General’s UK property trust, which launched in February 2006, broke through the £100m under management barrier just before its first birthday.

Michael Barrie, manager of the fund and property director at L&G, says much of the cash has been from retail investors, particularly those using their Isas.

He believes the UK commercial property market is strong. “We have been focusing effort on acquisitions in the retail Parks sector and in central London offices, where we see a lower void rates and consistent rental growth, and reducing our exposure in certain highstreet properties,” he says.

AWD Chase de Vere savings and investment manager Anna Bowes says investors considering property should be avoiding going niche areas.

She says: “It is far better to invest in a fund that not only has direct holdings, as opposed to the shares of companies that have property, but that also has a diversified property portfolio.”

Bowes,believes the £1.93bn New Star property unit trust contains the almost perfect mix of property for most investors.

The fund, launched in 1999, aims to invest between 75 per cent and 90 per cent of assets directly in commercial property and is diversified across the main property sub-sectors of offices, retail and industrial units.

She says: “For a investor looking for property exposure, it is not a bad bet and it has a minimum investment of £1,000.”

At the end of February, manager Roger Dossett had 71 per cent of the fund in direct property holdings, with 59 per cent of this is in offices, 24 per cent in retail and leisure space and 17 per cent in industrial property. He says: “The fund’s tenants are in the lowest-risk Government and UK banks’ category, 56 per cent of these were very low risk and 5 per cent were considered to be at low risk of rental default.”

He adds that the Investment Property Forum has issued a forecast total return of 9 per cent returns for UK commercial property for this year. Offices are expected to be the best-performing sector with12 per cent. “Within this sector, the continuing strength of the London office market is revealed by forecast returns for West End and City offices of 16 per cent and 17.2 per cent respectively,” he says.

Dossett is confident that all commercial sectors remain sound and discounts to net asset values have reappeared in the sector. “In fact, this share price weakness will be used to add to holdings at what appear to be attractive valuations,” he comments.

As far Bowes is concerned the bigger a property fund the better. She says: “The bigger the fund the more property is can afford and that adds a degree of liquidity if it has to get out of a particular market quickly. Investing in commercial means you are normally exposed to industrial, retail and office space. Funds that invest in smaller companies or one particular region are far more risky if things go belly up.”

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