It pays to go commercial to gain better rewards from property
PROPERTY CONTINUES to be an attractive investment which should be considered in any portfolio. Yet many overlook the opportunities beyond buy-to-let and second homes.
Comparing growth in the stock market with property prices is revealing. In the decade since the last interest rate rise, the average UK house has jumped by 19.7 per cent in price whilst the FTSE 100 has grown by 15 per cent.
Nationwide Building Society says that the average UK home is now valued at £211,085, reflecting a 2.5 per cent rise over the 12 months to the end of October. Halifax, the largest mortgage lender, says the average is £225,826, which is the highest recorded in its 34 years of research.
Both sets of statistics are based on a sample of mortgages approved by the lenders rather than when sales are completed. Halifax’s figures are more northern based whilst Nationwide has a southern bias.
Such increases reflect both confidence by the high employment rate and the insufficient housing stock available to meet demand. The Royal Institution of Chartered Surveyors reports that the stock of unsold properties is at a record low.
Few realise that local authorities have been actively purchasing, paying £2.7bn for commercial properties since 2015, a marked increase from £500m over the prior three years. Often such transactions are difficult to track as offshore companies have been used but the overall impact is still to boost bricks and mortar.
In terms of asset allocation, private client stockbroker J.M. Finn prefers property companies to open-ended collectives (like unit trusts) but cautions savers on liquidity.
Jason Hollands from Tilney, who advise Saga savers, says the key attributes to look for in a commercial property portfolio are:
Exposure to attractive locations across a range of sectors: industrial sites/depots, offices and retail outlets
Quality tenants who are unlikely to default or go into liquidation Long, unexpired leases High occupancy rates Fund management teams good at identifying opportunities.
Darius McDermott of Chelsea Financial Services has concerns about the UK economy owing to the “ongoing stalemate with Brexit negotiations” that house prices may stall and in some cases fall. He is not overly optimistic for the asset class currently. Instead of actual buildings, he would seek more liquidity through a fund.
F&C Real Estate Securities is tipped by McDermott as it provides access to a property portfolio in both the UK and Europe. It has a most experienced management team and is one of the best resourced.
He also likes the TR Property Investment Trust which invests in the shares of property companies of all sizes but has around 10 per cent in physical UK holdings. The share price is volatile but the returns over the long-term have been rewarding.
An alternative approach suggested by McDermott is the Premier Pan European Property Shares fund. This would provide a good level of diversification for investors and a yield of almost three per cent. The knowledgeable manager has built up around 150 stocks across the UK and Europe.
Commercial property is arguably not strongly correlated to the more traditional fixed interest and equity investment. As a result, Martin Payne, Leedsbased director of wealth manager Brewin Dolphin, feels it can enhance overall diversification of a portfolio, thereby reducing risk.
He says: “Whilst there are periods of time where capital returns are strong, the more traditional income (rental) stream contributes a large proportion of the total return.”
He prefers closed-ended vehicles quoted on the London Stock Exchange. During the credit crisis, many open-ended collectives not only reduced their pricing basis but suspended dealings to prevent holders from selling their investments. This scenario materialised again in the wake of the EU referendum.
There is still a degree of uncertainty hanging over the central London office market, reflecting fears that some banks may relocate staff and functions to EU locations postBrexit, but other parts of the property market – notably the industrial sector – have performed particularly well recently, underpinned by demand for depots as more shopping migrates online. City centre retail locations have also benefitted from the boost to tourism resulting from the weaker pound.
Payne likes Standard Life Property Income which is mainly invested in the office, retail, leisure and industrial sectors of the UK. It yields 5.2 per cent but – like much of the listed commercial property sector – trades at a premium, currently around five per cent to its net asset value.
TR Property, which has raised its net asset value by 22.7 per cent over the last year, is also tipped by Payne. It trades on a discount of around four per cent and yields 2.8 per cent.
For a share of large distribution warehouses strategically located close to national motorways, sea ports and rail freight hubs, Tritax Big Box is suggested by Payne. The warehouses are rented to large retailers with no more than 20 per cent exposure to a single tenant. The average lease exceeds 10 years and around half are subject to five-year rent reviews with the balance linked to RPI. The trust offers an income of 4.3 per cent but trades at an eight per cent premium to net asset values.
Tritax, which listed in 2013, was one of the first to offer exposure to warehouses, and is also tipped by Naeem Siddique, investment manager at broker Redmayne-Bentley, who notes it has jumped from £200m market capitalisation to over £2bn today.
Closed-ended funds are also preferred by Hollands as they need less cash to meet potential redemptions. His top picks are F&C Commercial Property and the more regionally-orientated UK Commercial Trust managed by Aberdeen Standard Life.
If looking for a hybrid between a property and an infrastructure trust, Medicx Fund fulfils the criteria. It invests in around 100 modern, purpose-built primary healthcare properties where the NHS is the underlying tenant. Payne says rents are reviewed upwards every three years which gives long-term prospects of rising income and the yield is appealing at 6.8 per cent.
Finally, there are two novel funds. Civitas Social Housing is suggested by Siddique. It was first listed last year with a five per cent target yield but currently has achieved 2.75 per cent.
GCP Student Living, launched in May 2013, is suggested by Payne. It invests in modern private student residential accommodation and teaching facilities in and around London. The premises are high specification with on-site gym, laundry service, communal area and study rooms.
The fund targets international and postgraduate students who are generally less price sensitive to rental fees. The current yield is four per cent although the fund trades on a slight two per cent premium.