After June 23rd 2016 referendum result came in and many property funds banned redemptions it was seen widely as a failure to protect this illiquid asset class from outside shocks.
Now with a general election only weeks away, combined with the much publicised failures of well-known names like Mothercare, for investors looking to play in this high yielding area, closed-end funds might be the preferred vehicle. These instruments don’t need to sell assets to fulfil redemptions as they are fully investing and also provide a healthy yield in a an environment of depressed returns.
The Association of Investment Companies hosted a lunch with the managers of BMO Real Estate Investments and UK Commercial Property REIT, Peter Lowe and Will Fulton respectively. The AIC has members invested in UK property to the tune of £15.9 billion, it’s a popular sector and varies from offices and shopping malls to supermarkets, social housing and warehouses.
Of the total AUM, £10.7 billion is invested in UK commercial property, one area it would be fair to assume would feel any Brexit woes first and potentially suffer the worst. However, both managers of their respective trusts revealed the discounts they’re trading on and it’s barely single figure so investor appetitive is clearly there.
Mr Lowe, manager of BMO’s product said: “The most immediate impact of the continued uncertainty on the real estate market is the collapse in transaction volumes which have fallen sharply and are now below long-term averages. While there will be continued near-term disruption and the potential for ongoing volatility in markets, the sector is in relatively good health and offers much for the medium-term investor.
“There is plenty to like about UK real estate, not least the yield premium, income growth in most sectors outside of retail, good levels of occupancy for quality stock and a relative absence of typical ‘late cycle’ behaviour in the lending and development space.”
Both managers talked about the importance of industrial real estate, a catch-all term used to describe logistics or fulfilment centres which have been on the rise since e-commerce exploded in popularity at the expense of physical retail such as the aforementioned Mothercare.
When asked why investors wouldn’t simply choose a pure play logistics trust, Mr Fulton stressed to importance of diversity within his fund although he did acknowledge the exponential growth of fulfilment centres across the UK. Mr Lowe have some interesting stats about how companies employing the workers need to mindful of nearby rivals in the form of mass retail parks where 25p extra an hour could see the logistics centre empty of its workers.
Mr Fulton said: “The industrial sector remains one of our favoured sector calls, which is largely due to the strength of the occupational market. Robust levels of rental growth in London, the South East and the best urban locations across the UK are a clear illustration of this. In addition, we see selective opportunities arising in the alternative sectors and expect interest in more operational sectors, which provide greater exposure to the underlying performance of income-generating assets, to increase going forward.”
When asked why the trusts won’t also add to their holdings buying shares in open-ended trusts, both acknowledged it was something that had been considered at some point but they prefer owning the physical asset as it gives them control over their respective portfolios. Given the continued Brexit shambles, investor looking for the yields on offer from UK commercial real estate may well look at closed-ended funds first as it’s less risky with healthy yields.
