Property is dead, long live property!
Rowan Dartington’s Signature managing director Guy Stephens explains why commercial property remains one of the most attractive asset classes
It is an unfortunate characteristic of human nature that when there is the possibility of losing money, we are around five times more likely to get emotional than when there is an opportunity to make money.
This is probably because a loss realised feels a lot more painful than a profit foregone. The former makes us poorer whereas the latter leaves us in the same position as before. No harm done.
When emotion dominates, this is when the markets remind us that greed and fear are hard-wired into market psychology. The trick is recognising when emotion, otherwise known as panic, has set in. This then allows cool heads to move in and snap up bargains at the expense of those panicked into accepting any price just to avoid further perceived guaranteed losses.
Last week’s closure of many open-ended property funds for only the second time in their history (we think) is a classic case of irrational investor decision making.
Readers familiar with our investment proposition will be aware that we track liquidity closely as part of our risk grading process. This means we tend to favour more conventional, mainstream investments over the more esoteric and specialist ones as the latter are often relatively illiquid and especially so at times of market panic. If a supposedly equivalent risk investment has the potential to be illiquid when there is a stampede for the exit, then does it really have equivalent risk? We would argue absolutely not.
We have two bricks and mortar open-ended property funds in our portfolios. It is no coincidence that they are also two of the few that have not been ‘gated’ to redemptions, although the net asset values have of course been adjusted downwards. We are monitoring the situation closely but are reassured by our process.
We read some reports of investment managers who got out of property in March and are now feeling the need to advertise this. It would be interesting to know what they subsequently invested in to achieve the equivalent low equity market correlation whilst achieving a 4% yield.
We have considered reducing our equity exposure at every asset allocation meeting since the beginning of 2016. The problem lies with what you do with the proceeds if your universe for reinvestment is similarly non-equity requiring income.
Infrastructure is one option with an attractive yield but it is also priced at a 10% plus premium in its investment trust form. Others may suggest structured vehicles or high yield debt but these present liquidity challenges.
We conclude, as we have concluded all year, that commercial property is a great diversifier, uncorrelated to equities and fixed interest and is a long-term strategic exposure, and not one to be tactically traded. It provides one of the most reliable, non-equity, income streams of all asset classes which grows in real terms over time.
We know that the UK economy is going to suffer an economic soft patch as Brexit uncertainty plays out. However, the level of pricing adjustment that we are seeing of around 20%, implies a reduction in rental income and a significant increase in voids through recession.
The most pessimistic forecast of the economic hit to the UK has been the possibility of a shallow technical recession of two negative quarters from Mark Carney. Does this really translate into businesses shutting up shop and vacating premises on mass as we navigate Brexit trade deals?
It all sounds rather far-fetched to us and so we are retaining our commercial property holdings for the same longer term strategic asset allocation reasons as we have for the last three years.
The valuations on Property Investment Trusts, the price discount and yield look eye-wateringly attractive.
When the prophets of doom foresee a certain disaster, it is time to get interested.