Property fund has produced annual return of 22.2% since launch and is positive on global market outlook medium term
The Henderson Horizon Global Property Equities fund is favouring the UK commercial market as well as Australian property companies.
Patrick Sumner and Sara Bellenda have been managing the fund since its launch in January 2005. It has produced an annual return of 22.2% since inception versus its benchmark the EPRA/NAREIT Global index of 19% as at 31 May.
Sumner says: "We remain positive on the global property market outlook over the medium term as office rents recover in a number of markets and investors' appetite for relatively stable, higher-yielding stocks show no signs of diminishing.
"We have an overweight position in the UK commercial property market as the rental value of buildings is expected to rise to 15% this year compared to single digits in 2005.
"In this market we are favouring the London office sector as a recovery in employment in the financial and legal industries has increased demand for space."
Two UK-based property development companies Sumner believes will benefit from the recovery in the London office market are British Land and Hammerson, as both companies have large stakes in this area. For example, British Land has £3.5bn worth of assets in city offices and £643m in office space in the West End.
Another area Sumner is investing in through London stocks is the India property market.
He says: "The Indian government has now opened its doors to foreign direct property investment as the country needs infrastructure to be built as the economy expands. Over the past few years, India has undergone an economic transformation, with many Westerncompanies outsourcing back office jobs to the region. The country now has a growing middle class but no major infrastructure to cater for it."
It is for this reason Sumner has bought two specialist Indian property development companies, Eredene and Trinity Capital. Both are listed on the London Stock Exchange and have plans to develop office and retail space in areas outside the major cities which lack infrastructure.
Eredene has raised £57.1m for ventures in India through the sale of shares, while Trinity Capital has raised £250m in an initial public offering.
Elsewhere in the Asia Pacific region, Sumner is seeing value in Australian property stocks as companies offer higher dividend yields compared to bonds. Stocks he favours include Lend Lease Corporation, which has a gross dividend of 6.03% and Stockland Trust, which has a gross dividend yield of 6.18%. Presently, the interest rate in Australia is 5.75%.
He sees more risk for the rest of Asia, particularly Japan, and says investors have become concerned that property stocks will be affected when the Bank of Japan ends its zero interest rate policy.
"A rate hike is not what people want in Japan as they feel it may stifle growth, which could impact the property development industry in the country," he explains.
"We still have not seen consumer expenditure growth improve in Japan and developers are cautious about projects in case the economy slows."
Sumner is also cautious about the US because of the prospect of higher rates.
He adds: "Yields are lower on US property stocks than bonds and if the Fed raises rates from 5% it may encourage investors to put money in other asset classes. The portfolio is underweight interest rate and yield sensitive companies and sectors, which would not be expected to perform well in this environment."
Although Sumner has an underweight position in Canada, he favours this market over the US as dividend yields are higher than bonds. For example, Canadian-based company Boardwalk Equities is producing a dividend yield of 5%, while the Bank of Canada rate is presently 4.5%.
Stock decisions are based on the management of the company, whether or not they give shareholder value and its price compared to its peer group. There are 124 stocks in the portfolio and Sumner has a turnover rate of around 60% to 80% a year.
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