What a difference a year can make. Yield-hungry investors of all descriptions have been pouring into pooled property funds. The latest figures from the UK’s Investment Management Association, for example, show that property was the best-selling sector in January – as it was in the final quarter of last year – attracting £373m (€422m).
“It was difficult, 18 months ago, to entice anyone into property; too many had had their fingers burned in the crisis,” says Rupert Robinson, chief executive at Schroders Private Bank. “NAVs had collapsed and illiquidity was firmly in the spotlight. Now we’re seeing a marked pick-up in demand for property investment, particularly from overseas investors because sterling has fallen against the euro and dollar.”
This time, however, asset management groups are taking a more moderate and tempered approach. “A number of open-ended funds have already put up the shutters to new money,” says Mr Robinson.
“This is a marked change of attitude from the approach in 2007 where asset managers became greedy and took more and more money, investing it into property that was already well priced – managers are now more circumspect about how much they take from investors and how much they are willing to pay for assets.”
Prime offices in central London have been leading the recovery, as companies compete for a dwindling amount of high-quality space. Financial institutions agreed new leases on more than 195,000m2 of offices in the City and the Docklands in the first quarter, a five-fold increase on 2009, according to New York-based property broker Cushman and Wakefield, and rentals rose 14 per cent in the first quarter compared with the final three months of 2009.
Arguably, however, the industrial sector is more attractive as it is linked to general economic activity rather than employment levels, particularly as the financial sector has not started to replenish staffing levels.
“Property fundamentals are still relatively weak – these flow from economic conditions – weak economic growth and weak or even negative employment growth depending on the locale,” says Bruce Eidelson, director, real estate securities at Russell Investments. “The office sector is heavily dependent on financial services, which has been adversely affected and continues to be under pressure,” he explains.
“Retail properties and the warehousing sector should also bounce back as consumers become less cautious and the recovery appears sustainable. The sector recovering most strongly, however, has been hotels as business travel budgets and leisure spending have ticked up. Much future growth is now priced in, but a case can still be made for further progress.
“One challenge the sector had was the high level of short-term interest in late 2008 and early 2009 from hedge funds and other speculators but that has now declined and we are seeing more price stability,” says Mr Eidelson.
“That was hot money but we’ve been seeing a stable level of commitment to the sector. Most institutions have stuck with their allocations, and a number of clients who did not have exposure have been coming back in.”
Some managers are taking the opportunity to arbitrage a valuation disparity of around 10 per cent between stocks in the development stage with greater gearing and stretched balance sheet, and more defensive mature stocks such as healthcare. For example, Steve Buller, portfolio manager of Fidelity Real Estate Portfolio, says he has been taking positions in stocks with valuation issues, that he thinks will come good.
The UK market’s recovery is lagging parts of Asia and Australia, and even the rest of Europe, with NAVs down 50 per cent from their peak. Funds such as MSMM Global Real Estate Securities fund have therefore taken an overweight position in the UK on the calculation that valuations will bounce back. UK stocks are traditionally more responsive to value adjustments than stocks elsewhere, particularly in continental Europe.
Buying property in South East Asia and China has become a gravy train for investors looking to ride the booming economic growth of emerging markets.
The younger economies have a chronic need of infrastructure; world grade offices are in very short supply in Rio and Sao Paulo, for example. Most of the focus in Asia is on the retail sector to capture the spending power of the new middle classes, but the threat remains that interest rates could rise and dampen prices, and that much of the good news is already in the price.
Just as many funds in the sector, such as the Russell, Robeco and Invesco funds included in the table, are overweight Asia Pacific and Australia, many are underweight North America. High foreclosure in the US is taking its toll on retail markets due to the higher correlation between the health of the housing market and retail activity.
