The new fund will be managed by Threadneedle directors Don Jordison and Chris Morrogh. They have been running property funds mainly for the institutional market and currently have over £1bn assets under management, including the offshore Threadneedle property trust.
The new fund will be the group’s first onshore property unit trust. The company says it wanted to launch an onshore fund for retail investors because this type of property fund is now eligible for Isas and Pep transfers.
According to Threadneedle, income returns will dominate total returns from UK commercial property over the long term, but investors have been blind to this due to the recent period of strong capital growth.
Jordison and Morrogh will focus on properties that can deliver high yields bit which do not cost as much to buy as properties in the ‘super prime’ area of the market. According to Threadneedle, the yield on ‘super prime’ properties is quite low and it only takes one glitch in rental growth to destroy a property’s value.
They believe also assets are very scarce and expensive in the super prime market relative to the risk and return ‘sweet spot’ they have identified.
Threadneedle’s ‘sweet spot’ is just below the prime area of the market. While tenants are likely to regard these properties s as high quality, the managers say investors may not immediately hold the same view.
The fund will not invest in speculative development because the managers are uncomfortable with the level of risk involved. They point out that in genera the only property companies that go bust are developers and there are potentially too many things that could go wrong.
Instead they will focus on the secondary market as they feel the potential risks, such as vacant periods after leases expire, are overstated. In their experience, only 15 per cent of tenants leave at the end of every lease.
Upgrading and refurbishing existing properties creates and protects value in Threadneedle’s view. They will concentrate on active management of property portfolios, controlling rent reviews, lease renewals and re-letting.
Threadneedle believes the fact that each property is unique means that portfolios need to be run with more flexibility than equity portfolios.
The managers will focus on stockpicking rather than benchmarking because they think that managing to an index such as the IPD does not add value. They point out that a direct property fund cannot replicate the entire property market like an equity fund can replicate stockmarket indices, so property manager need to have a strong conviction about every property they buy.
This fund stands out among many recent property-based launches as it is not jumping enthusiastically on the Reits bandwagon. Although the fund can include property shares, these will be used sparingly as they are more volatile than direct property investments.