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Quality street

Gregor Watt reports on fund managers’ views on property internationally

Since its low point of two and a half years ago, commercial property has managed to recover a lot of the ground it lost in the disastrous six months between September and December 2008.

The latest figures from IPD and the Association of Real Estate Investment Funds shows that the strong investment growth of the last two years is starting to tail off but some fund managers say there are still investment opportunities.

The latest statistics from the IPD/AREF UK pooled property fund index from the end of the second quarter of this year show average growth for all pooled property funds falling back to just under 2 per cent in June 2011. This continues a long-term slowdown in growth from the peak of 10 per cent hit in December 2009.

IPD director of UK and Ireland client services Malcolm Hunt says: “Despite two years of positive growth, slowing returns among specialist funds have brought the overall index down to 1.9 per cent for the quarter to June.”

Despite the slowdown in growth in the UK, managers remain positive about its attractions.

Standard Life Investments head of real estate David Paine says: “In the UK, a supportive interest rate environment looks to have been cemented by a unanimous MPC vote in July to keep rates at record low levels. These low rates continue to support the real estate asset’s risk premium. Two full years of capital growth for the IPD index reflects investors’ positive sentiment towards commercial property.

“Recent volatility and ensuing elevated economic weakness are likely to have an accentuated effect on investor sentiment towards riskier poorer quality assets. While yields on gilts remain low and with further uncertainty in the equity markets, real estate continues to hold its own against other asset classes. In contrast, UK commercial real estate income yields are currently 6.3 per cent.”

Away from the UK, the outlook for global property could offer investors a buffer from the volatility in equity and bond markets and a general slowdown in economic growth.

Alan Supple, portfolio manager at Urdang, BNY Mellon’s global real estate investment specialist, says: “Our outlook for the global property securities market remains pretty positive, notwithstanding the fact that it has been one of the best-performing asset classes in 2011 so far in the UK. We believe markets generally have entered a lower-return, less-leveraged environment.”

In the face of lower growth in investment markets and stagnating economic growth, it is the ability for property to generate income that will make the difference for successful property investors.

Supple says: “We expect to see an ever greater focus on income-bearing assets, too. In the long term, income is the most important element of the total return from property assets. The bias in the listed sector towards high-quality assets with long lease terms and good tenants means that asset valuations are backed up by good cashflows. Furthermore, it is important to reiterate the value of liquidity and transparency attached to listed investments.”

Supple says there are good opportunities in Asia and Germany, although he remains cautious of the other eurozone countries.

Paine also remains wary of much of Europe. He says: “In Europe, concerns over the strength of the real estate outlook have deepened. The softening in underlying drivers and widespread GDP downgrades suggest returns will be lower than previously thought. The trend of investor focus towards prime real estate is expected to continue as lower-yielding “safe haven” assets continue to appeal. Liquidity is expected to remain restricted for the foreseeable future as tighter regulation and bank deleveraging continue.”

Areas where he sees opportunities include very specialist areas such as Hong Kong, London and Paris office markets and he is also positive on Asia.

He says: “Amid the recent market turmoil, Asian markets remain resilient. Real estate markets are a product of the underlying economy and despite signs of a slowdown in Australia, the Asian economies generally remain buoyant. This should translate into healthy future demand from tenants.

“Concerns about a slowdown in activity in Singapore and an increasingly tight labour market in Hong Kong have emerged. However, the region’s robust underlying growth dynamics are expected to continue to underpin real estate markets.”


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