Strong opportunities in property market, F&C’s Glover says
Fund manager of the F&C UK Property Fund Guy Glover believes there are opportunities in the property market to drive a strong income return for investors without having to go up the risk curve.
Property has traditionally been favoured for its relatively high income return; investors can still secure this, not by necessarily going higher up the risk curve, but by adopting a ‘core’ or ‘core plus’ strategy of finding good quality, well-let buildings producing a strong income return.
The secret is stock selection and having a rigorous process to identify properties where the level of income can be grown. We have adopted a number of initiatives to drive income returns from properties and a couple of examples are as follows:
1) Buying property at rebased rental levels, where the rent a tenant pays has reduced but the location and building quality are still excellent and so there is an opportunity to capture future growth.”
As an example, F&C acquired two properties in Bristol Business Park next to the University, which are let to a secure tenant on leases with over 10 years unexpired. Performance will be driven from the low entry point for the rentals which average £18.75 per square foot, a significant discount to the highest rent achieved on the park at £27 per square foot. This strategy enables us to position the portfolio to capture potential growth for our investors, at the same time not going up the risk curve because the properties are good quality, let to a strong covenant.
2) Selecting stock in locations where there is strong demand for buildings, leading to competition for buildings which offers scope for rents to increase.
For example, although generally the high street retail market has been in some difficulty, in some locations there are opportunities. We acquired a property in George Street in Edinburgh three years ago, partly let to JD Wetherspoon and over the period of ownership managed to increase rent by c. 17%. Part of the decision to acquire this unit was on the basis that there was still strong demand from tenants leading to competition and higher rents for the available units.
With the UK forecast to return to pre-crisis levels of output by the end of 2014, we anticipate an improving occupational market and therefore stronger demand for quality buildings in established locations as firms relocate for expansion.
In the UK regions, potentially attractive assets may have been indiscriminately shunned on locational grounds during the downswing, but as the economic outlook has improved, investors have started to look more closely at the opportunities the regions can offer. The South East office market has been a major beneficiary of this trend with an income return of more than 7% per annum , supported by ‘spillover’ from a buoyant Central London market and helped by an employment base geared towards expanding industries such as oil, telecommunications, media and technology (TMT) and pharmaceuticals.
While there are areas of opportunity, there is also downside risk. The macro-economic and debt problems globally have not been resolved and the UK economic recovery is still quite fragile. While UK commercial property is predicted to see a stronger, and less volatile, performance over the next few years than in the recent past, the property market will be subject to conflicting pressures. It will be about choosing the right assets, buying at the right price and managing the asset effectively to add value.