Data from the Investment Management Association (IMA) has revealed that in June, investors piled more cash into UK commercial property funds than in any month since 2009. David Hambridge, head of multi-asset investing at Premier, believes that investors who are eager to catch the rising UK property tide are right to focus their energy on the commercial, rather than the residential property market.
‘Most investors have substantial exposure to the residential property market in the UK through their home, and it is geared exposure as well. And of course most people agree that the residential property market looks expensive right now.’ READ MORE: Commercial property outside of London ‘still 30 per cent below peak value’ A perennial dilemma for investors in property funds is whether it is best to seek this exposure through open- or closed-ended funds. Hambidge describes neither as ‘ideal’.
The problem for investors in open-ended property funds is that the fund manager usually has to keep a substantial exposure to cash, which can dampen returns. This exposure to cash is necessary to ensure that the fund has cash on hand in order meet redemptions (that is, pay investors who want to sell their units in the fund). In open-ended funds which invest in equities or bonds this isn’t a problem because the fund manager can usually raise the cash quickly by selling those very liquid assets – but a property can take months to sell.
Hambidge remarks that this can lead to a scenario where only 80p of every pound an investor puts in is actually invested in property, with the remainder held in cash or other liquid assets, which yield barely anything. This situation had led to Hambidge to focus his property investments on closed-ended funds, also known as investment trusts. ‘But the problem with these,’ he notes, ‘is that if you had bought a property investment trust around the time of the financial crisis, you were buying at a considerable discount, but most of them have now gone to a premium. This means that one is overpaying for the underlying assets.
‘While central bank policies have pumped up the prices of every asset, this has not happened with commercial property, which remains below peak levels. Commercial property is 18 months to two years behind other assets in terms of the recovery.’ Hambidge, who manages a suite of multi-asset funds, has increased his exposure to commercial property through funds to 22 per cent. His usual exposure is around 6 per cent. He has increased this exposure to property by selling ‘everything else’, explaining: ‘I think bond and equity markets are overdue a correction. They are on a completely different cycle to property.’ The fund manager’s favourite open-ended property fund at present is the SWIP Property Trust. ‘Although SWIP has recently been taken over by Aberdeen, the strategy will remain the same. I have also added exposure quite recently to the Henderson UK Property fund, the Standard Life Investments UK Property fund, and the Threadneedle UK Property fund.
‘This last one offers particular appeal as it has virtually no exposure to London commercial property at the moment, and certainly we feel that the better value is outside of London, perhaps in the wider southeast. London is the place to be for yield, but look elsewhere for value.’ The SWIP Property fund is a £2.7 billion fund that is amongst the top 25 per cent of funds in the IMA Property Sector over the past 12 months. Darius McDermott, managing director at Chelsea Financial Services, agrees with Hanbidge’s analysis that most investors should look to get exposure to commercial property as opposed to residential. ‘We feel that for most investors, the family home means that they have substantial exposure to UK residential property anyway, so they should look to diversify away from it.’ He nominates the Henderson UK Property fund as his favorite way to get exposure, and also selects the L&G UK Property fund. ‘The Henderson fund is the blue-chip UK property fund, in terms of the quality of the buildings and their locations, but also the length of the leases.
The L&G Property fund is one which has a very experienced team, and came through the financial crisis best.’ Martin Bamford, managing director at Independent Financial Adviser Informed Choice, nominates the Ignis UK Property fund. McDermott explains that this fund recently converted to a Property Authorised Investment Fund (PAIF) structure, which has certain tax advantages, but the at the moment these funds are not offered by any major platform. Investors can still buy the fund through what McDermott calls a ‘feeder fund’, where they get the same holdings, but without the additional tax benefits. Hambidge likes to use property investment trusts to invest in niche sectors that open-ended funds do not reach. ‘I have tried to use the investment trusts to get more diverse exposure. So I hold Medicx, which invests in GP surgery buildings.
That is a totally different cycle to the rest of the economy, and to a very large extent the cash flows are government-backed. They build customised GP surgeries which means that the tenants are likely to remain there for a long time. I have also invested in Target Healthcare, this is quite a small holding in my funds, just 2 or 3 per cent. But again it is about diversification – they build care homes, quality, high-end care homes.’