In the latest of a series of property related interviews, John Wilson, Head of Property at Britannic Asset Management gives a quarterly update on the performance of the property fund and the market.
He also explains why he thinks commercial property returns will reach 11% for 2005.
Britannic Asset Management recently launched a UK Property Fund. Here to talk about the performance of that fund and update is John Wilson. John, how have you felt about the performance since launch?
Performance has gone well actually; the total return since December is, year to date is 5.4%, which puts the fund ahead of its main rivals. *
Now in your recent fact sheet you said it was on track for its target return of 11%. Do you still feel that that’s the case?
Absolutely, 5.4% is virtually halfway there when we’re not even halfway through the year. We still consider 11% from a market point of view as a very achievable target for 2005.
So where has that performance come from?
Performance has come from stock selection basically, and across the board so far as the portfolio has been concerned, which has been a pleasing aspect of what we’ve seen over the first part of the year.
Just remind us of the characteristics of this new breed of fund.
Yes sure, quite recently the Government changed the legislation so far as authorised property unit trusts are concerned. Historically they could only invest up to 80% in property. They now can invest 100% in property. Our own fund is the first of those, that new breed of fund. It is the fact invested virtually 100% in property, only has 2% cash. The fund itself is a well diversified portfolio, institutional quality portfolio of £300m. With a high yield it pays income monthly. So a very attractive proposition for investors.
And would you say it’s been a successful launch, have you had much inflow in terms offunds?
Yes, we’re still at the relatively early stages of marketing the fund, but interest thus far has been very encouraging; we have seen inflows into the fund and we expect to see substantially more inflows into the fund.
What’s your attitude to cash in this portfolio?
Well, we’re very well set up to manage cash inflows. I mean I suppose the first thing I would say is that we don’t really want to see substantial amounts of cash in the fund, we want to get those invested into property on behalf of our investors as soon as we can. And that will be our aim and I’m very confident that we’ll do that.
So what’s the current shape of the portfolio?
In terms of benchmarking one would characterise it as underweight retail, overweight industrials and broadly in line with offices. It is a diversified portfolio across mainly those three sectors. It’s a structure that for the time being we are comparatively comfortable with.
And remind us of your proxy benchmark again.
Proxy benchmark is what’s known as the IPD Balanced Monthly Funds Index.
Now you also analyse your properties by income flows, are you seeing all three sectors providing good income flows?
Yes, the income yield on the portfolio is very healthy, it’s actually above the benchmark level; it’s very strong, about half a percentage point above its benchmark level. The fund has very low level of voids and it’s under 3% compared with a benchmark average of around 8%, so a very healthy income stream indeed.
Is it possible to talk about geography where the three sectors are concerned?
The fund itself is diversified across regions as well as being diversified by sector. So to that extent investors should be comforted by that.
So no real hot spots?
No particular hot spots; a generally well diversified portfolio, yes.
So let’s go into a little more detail on the sectors then.
Yes, I mean so far as the retail sector is concerned, there are some issues around consumer spending. Consumer spending forecasts suggest that spending will get weaker, which logically will have an impact on renter growth at some stage. We ourselves are playing that by being cautious on the high street. We remain buyers of retail warehousing because we believe the longer-term fundamentals in that sub sector of that market are better. Looking at offices, probably the main issue for us there is the city office market where vacancy rates remain historically very high. Nevertheless investors, investor pricing seems to be discounting fairly strong rental growth at the moment. We are doubtful about that and therefore not really buyers of city offices currently.
Do you think that will ever come back? When do you see the point at which you will be looking at that area again?
I think, yes, it will come back. Vacancy rates will be eroded. It remains more a question of timing than if it will happen.
This year?
No.
Do you have a particular stock in the portfolio that might be termed a favourite or favourites at the moment?
I wouldn’t describe the stocks as favourites as such. Certainly during the first part of the year a property called Stock Exchange House in Glasgow performed particularly well for us. It’s a substantial, very prime piece of real estate on Buchanan Street, mainly retail with some offices above. It’s benefited from good rental evidence that’s been seen in retail property on Buchanan Street. We think the outlook for rental growth on Buchanan Street remains positive, so we’re very hopeful of seeing more performance from that property in the future as well.
And the £300m currently in the fund, how many properties does that actually represent?
It’s 38 properties, approximately 120 tenancies.
And are there any specific sizes of properties that you would look for for a fund of this size?
We’re really targeting for investment purposes properties from about £5m and north of there. That’s really the market that we’re in.
Okay, and you say you’re out marketing it, and that’s presumably going to continue. Are there any management changes in the fund that people need to know about?
Not so much management changes, there have been personnel changes that perhaps people would like to know about. We’re in the process of recruiting an experienced investment manager for the fund, someone who will be focused entirely on this fund. The rationale behind that is really to gear up for anticipated future growth in the fund and be well prepared for that. We also have recruited an additional asset manager in February, who’s now working with us, a chap called Spencer Howard, experienced investment manager joined us from Chesterton’s in London.
What are the big issues or the general issues in property at the moment that may concern you?
I guess we’re starting to see some press comment to the effect that or are questioning whether we are in a bubble situation within the commercial property market, and if so, is that bubble about to burst. Our own take on that is that we aren’t in a bubble situation as our forecast for this year’s total return would indicate. We are, and indeed many forecasters are anticipating total returns of on average 8% for the next five years or so.
And this year of stamp duty exemption, has that been of concern to you?
It’s not so much been a concern. We had a one off hit on the values of certain properties across the market; this was a change in the low end stamp duty whereby properties in what were known as disadvantaged areas were stamped duty free prior to the last budget, the budget changed that, those properties are no longer stamp duty free. As I say it was a one off hit on a limited range of property.
And it’s worked its way through?
It’s worked its way through the system indeed.
How would you sum up your general outlook for commercial property investment going forward?
I remain positive about it. As I mentioned earlier, you know, our 11% total return forecast for 2005 remains in tact. The market has become, is no longer cheap, but there’s a difference between not being cheap and being outright expensive in a bubble kind of situation. So we continue to be optimistic about future returns.
And for this fund in particular and the way you invest with it, what’s your view?
We would anticipate investing new funds partly in offices. We think that so far as the sectors are concerned, we will see convergence of returns during the course of this year. We’ll probably see offices taking over sector leadership in 2006. We also would like to invest some additional funds in the retail warehouse sector, which we see as having, continuing to have good long-term growth prospects as well.
So generally a positive view going forward?
Generally positive view going forward, absolutely.
But have you any real concerns?
I don’t actually see any major concerns. We do anticipate yield compression as a driver for capital growth reducing over the year and into next year as well. We anticipate rental growth continuing albeit at comparatively modest levels compared to previous cycles. There are other more general issues, things like REITs on the horizon, but there remains a number of question marks over them, they’re not actually available at the moment anyway. Stamp duty we’ve touched on before; stamp duty is a perennial threat to the property market, you know, the Government at any time can put up stamp duty. Fortunately over the last couple of years, it’s tended not to be putting up the main rate of stamp duty, so again no reason to think that in particular that’s any more of a threat going ahead than it has been in the recent past.
Interest rates?
Interest rates. The market seems to be feeling that interest rates are perhaps now peaked, and then the next move, whenever the next move happens, may well be downwards rather than upwards. I think that’s a view shared internally here, to the extent that that is the case, I would see that as being a positive for the property market rather than a negative.
John Wilson, thank you.
Thank you very much.
The content of this interview is intended for investment professionals only.
Past performance is not a guide to future performance. The value of units and the income from them can go down as well as up and is not guaranteed.
*Source: Lipper, bid to bid, net income reinvested to year to date to 31/05/05.
Information and opinions contained in this interview have been compiled or arrived at by Britannic Asset Management Limited. Britannic Asset Management Limited and Asset.tv Ltd accept no liability for any loss arising from the use hereof nor make any representation as to their accuracy or completeness. Any underlying research or analysis has been procured by Britannic Asset Management Limited for its own purposes and may have been acted on by Britannic Asset Management Limited or an associate for its or their own purposes.
Britannic Asset Management is the trading name of Britannic Asset Management Limited group which includes Britannic Fund Managers Limited and Britannic Investment Management Limited. Both companies are authorised and regulated by the Financial Services Authority.
