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Property Special Report: London calling

PROFILE: Samantha Downes interviews ING Real Estate Management Company chief executive Stephen Pyne.

Overseeing 33 property funds has given Stephen Pyne a knowledge of the market that most likely surpasses many of his contemporaries.

Pyne originally trained as a chartered surveyor with estate agent Hillier Parker – now CB Richard Ellis – and from there went to ING Real Estate Investment Management where he is now chief investment officer.

In the last 20 years, Pyne has advised institutional investors on all aspects of property investment from strategic analysis and portfolio planning to implementation. His knowledge has helped ING Real Estate Investment Management grow its assets under management to more than euro 75bn (47bn) by the end of 2006.

Advisers will be familiar with ING’s two retail funds, the ING UK Reit and the Skandia property fund. The latter has returned 20 per cent in the year ending February 28, 2007.

Pyne says: “I think it is because we have got a robust investment strategy, and that is because we take a three to five-year view of the market.”

The 600m property fund, managed on behalf of Skandia has benefited from intense investment in the London property market.

The fund was launched at the beginning of December 2005 and has just over 500m and holds 27 properties – a mix of large retail such as Currys in Croydon, office space in Conduit Street, London and Homebase and Toys R Us warehouse retail units in Reading. There are also non-London holdings such as Llansamlet Retail Park in Swansea and industrial units via Rockware Units in Doncaster but it is in London that Pyne is placing most of his confidence.

He says: “In the last three or four years the London office market has been exceptional with 18 to 20 per cent returns before you take into account any gearing.”

Compared with its benchmark, the HSBC/AREF All Balanced Pooled Funds index, the fund is overweight in office space and this is something Pyne is keen to maintain this year.

Just over 80 per cent of the Skandia fund is invested directly in commercial property, with the remainder invested in property-related companies.

Taking a long-term view of all commercial property components, including retail, industrial and office space, it is retail that is worrying Pyne most.

He says: “We are projecting big variations between the top-performing sectors and the bottom sectors. For example, retail yields will fall.

“If the market has been delivering 18 to 20 per cent, we are now saying that returns will dip and our three-year view of retail is that it will average about 9 per cent. Most investors will be happy with that.

The reason for retail’s relative underperformance is twofold.

First, says Pyne, shoppers’ habits are changing, with examples evident in the growth of online shopping which devalues the rent that the owners of retail property can charge.

But online shopping or not, shoppers are still heading to stores, but are more likely to be shopping out of town.

Pyne says: “Retailers are now starting to favour out of town warehouse style units, because parking is easier, and they have a captive market. A good example is Next which is taking a B&Q approach to its stores.”

Fashion retailers are the fastest-growing group of warehouse-style retail outlets, according to Pyne.

The second constraint on retail property is that of supply. Planning permission for out of town shopping centres is less easy to obtain than it once was.

He says: “Lack of supply means we can charge more for rental but at the same time there may be a limit to how many more such retail units can be built.”

Industrial property is probably the least exciting sector for Pyne, who expects returns to remain fairly static in the coming months. Residential holdings are now completely out of favour with Pyne and represented only 0.5 per cent of the direct property within the fund at the end of December 2006.

As for ING’s UK Reit fund, Pyne is confident that the offshore-listed fund, will also benefit from supply and demand issues within the London market.

In the long term, Pyne believes Reits are an exciting new asset class, with the potential for huge growth and opportunities.

There will be some consolidation, for example, he believes some newly converted Reits will become takeover targets themselves but he does not believe that retailers with big property portfolios will be tempted.

He says: “Tesco and Marks and Spencer have huge property holdings and there has been some talk that they will spin off these interests into separate companies but I believe the value of this property is too great to be spun off.”

However, there are some interesting developments within the Reit market that Pyne will be watching closely as fears that property and land are overpriced are already starting to influence the behaviour of companies with big land portfolios.

He says: “We may see more leaseback deals, with companies choosing to outsource their property interests. For example, Tesco has just completed a leaseback deal whereby it has sold one of its retail stores to a land company and then rented it back.”

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