"Property is likely to increase in 2010 as investors seek alternative sources of income and ways of hedging against the threat of inflation," says Threadneedle's Don Jordison
Don Jordison and Chris Morrogh have jointly managed the Threadneedle UK Property Trust since its launch in February 2007.
The fund aims to generate a total return based on income and capital appreciation through investment in the UK property market. The strategy continues to be to compile a diversified portfolio offering a significant income advantage to the market as a whole.
Jordison says: “The trust will seek further investment across all sectors of the market that can be identified as offering good value in the current market and where value can be added.”
After a testing 2009, he believes there will be surprises on the upside in 2010 because of the “extraordinary” amount of liquidity targeting UK commercial property from overseas investors, UK institutions, UK private individuals, and sovereign wealth funds.
“If you were to categorise every major source of investment liquidity, it is there for this market, and not surprisingly so. We believe that interest in property is likely to increase in 2010 as investors seek alternative sources of income and ways of hedging against the threat of inflation.
“The best opportunities are to be found in the secondary tier of the market, where good quality, well-let properties are still available at very attractive valuations. With good long-term investments available in all sectors, stock selection and active asset management are likely to be more important drivers of performance than sector strategy.”
The manager believes the fund has benefited from the fact it can only invest in the UK property market. “It has been wonderful because the property market hit rock bottom in the summer of this year,” Jordison says. “What this meant was you were able to buy UK property up to 50% cheaper than at the peak of the market. And this is the environment in which we have been investing our cash, which is a completely different environment to when competing funds where investing which was leading up to the peak of the market.”
Steady shift
During the year the managers have steadily shifted the fund from an extremely high cash balance, designed to protect investors from the effects of the downturn, into a rational acquisition programme of quality high yielding assets.
Jordison believes investors will continue to take advantage of the fact that despite recent improvements, UK commercial property is still around 40% down on its peak. “You just cannot find another real estate market in the world which offers this kind of potential,” he says.
“It never ceases to amaze me how financially literate our investor base is. They are right on the money. They do not need it explaining to them that a market which has sold off by nearly a half has got to be of interest when it brings with it an income return in the mid-sevens.”
The fund’s directly held property portfolio consists of holdings with a wide geographical spread across the UK. The properties are all fully let with a rent-weighted average unexpired lease term of 11.5 years.
The property portfolio at 30 November has an independent valuation of £36,166,000, providing a net initial yield of 7.9%, a reversionary yield of 8.0% and an equivalent yield of 8.5%.
The fund’s largest sector exposure at 30 November is to retail warehouses, which accounts for 35.4% of the portfolio, followed by shops at 33.1%, industrials at 19.0%, and offices at 7.8%.
Top regional weightings are North 31.4%, Southern 24.5%, Yorkshire/Humberside 21.1%,
Midlands 16.9% and Scotland 6.0%. The fund has zero exposure to the Eastern, London, Wales and Northern Ireland regions.
According to Morningstar, the fund is ranked 27th out of 36 vehicles in the IMA Property Sector over one year to 30 November, down 3.1% against an average increase of 12.8%.
But Jordison believes that is partly related to the high cash balance of the fund at the start of 2009, compared to many of its peers in the sector.
“The fund started the year with a 65% liquidity margin at a fund size of around £45m. Now it is 80% invested and is worth £130m. What we have been doing is turning cash into property through the bottom of the cycle, but obviously all of the cash is not being committed to the market during this period. So we have had a cash drag versus someone who would have had a very high property weighting probably because they had a lot of redemptions over the previous two years.”
He also believes the fund mandate to only invest in direct property means it has not been able to benefit from the market rally: “The Threadneedle proposition is stable returns and low volatility from a high exposure to direct property. What we have not had is the free bounce from owning quoted REITs.”
