// Bricking it? gatekeepers and property

24 Jul 2019

Now that Boris Johnson is the Prime Minister, the possibility of crashing out of the EU on 31st October looms large on the horizon. It would be no surprise, therefore, if advisers and investors turned to so-called safe havens like property.

Historically, property funds were plain vanilla, containing UK-based offices, supermarkets and warehouses, with a wodge of cash – often up to 25% – to provide liquidity for exiting investors, given the lengthy process of selling properties.  Prices rose slowly but inexorably, accounting for rental and occupancy, while agents constantly up-valued the bricks-and-mortar in the absence of a sale price.

Proliferation of property funds

Today, there are several types of property funds. Direct Property funds hold bricks and mortar and have no liquidity limits other than FCA TCF guidance.  When outflows exceed inflows, they’re ‘gated’, redemptions are limited until cash is generated from property sales.

Other funds consist entirely of Real Estate Investment Trusts (REITs) and other shares in Property companies — this provides liquidity, but at the cost of higher daily volatility.  Yet more funds are focused on Ground Rents, on residential property, student accommodation, social housing and so on.  Geographically there is no limit to the opportunity with no jurisdiction being off-limits.

The diversity of property funds provides choice but is also a dilemma. Most asset allocation models recognise and define the asset class in terms of directly invested commercial property, but with 60-odd diverse property funds, confusion was also creeping in. As a result, in September 2018 the Investment Association split the sector in two. 

Specifically, the UK Direct Property sector includes 17 funds investing at least 70% of their assets directly in UK commercial and residential property, along with student accommodation, leisure and healthcare assets. The other Property sector, ingeniously named Property Other includes over 30 funds investing in everything else, for example property securities, direct funds with a specialist mandate and hybrid funds. 

UK Direct Property

See top UK Direct Property funds here

In 2018, the average Direct Property fund rose by just under 4% — the only non-Cash sector to do so. Property Other, meanwhile, lost over 3% so Gatekeepers have clearly focused their attention on the UK Direct Property sector. The leading fund by gatekeeper picks is Janus Henderson (18), but the TIME Freehold Income fund blazed a trail with three-year returns of 8.99, but it has no picks. This, and several other funds in the top 10 for three-year returns are not on any gatekeepers’ radars.

The clear winner in the UK Direct Property sector was Time Investments with two funds in the top 10 for three-year returns and three in the top 10 for one-year returns. The Social Infrastructure fund was only available to retail investors from October 2018, while the Freehold Income fund is monthly traded.  The Commercial Freehold fund has recently been reconstituted as the Commercial Long Income fund. Gatekeepers may well be paying more attention to TIME in the future.

Property other

See top Property Other funds here

In terms of Gatekeeper picks, the Property Other sector is dominated BMO Property Growth & Income with 18 picks. The iShares’ Global Property Index fund is next with 14 picks followed by the Schroders Global Cities Real Estate.  After that the numbers quickly tail off.

Outperforming the most popular funds by a country mile is the SKAGEN m2 fund, an actively managed Norwegian-domiciled fund with a global investment mandate. It looks for investments that are ‘under-valued, under-researched and unpopular’. Despite its top centile performance over the last five years, it has barely registered on most gatekeepers’ radars.

Most of the funds in this sector, by their nature, exhibit equity-like volatility, given their securitised holdings.  However, one notable exception is the £56m TM Home Investor fund, managed by Hearthstone. The fund invests in a portfolio of over 200 residential properties which are then let under assured shorthold tenancy agreements (ASTs) and corporate lets. 

The TM Home Investor fund had remarkably low volatility (due to investment in bricks and mortar) with a three-year return of 2.8% and a diversification benefit through a Beta of zero, ie the fund is effectively uncorrelated with others in its sector. Hearthstone uses quantitative asset allocation methods and qualitative regional stock selection to build a portfolio that reflects the distribution of UK mainland housing stock. Investment returns are comprised of capital growth and rental income.

Graham Bentley
graham@gbi2.co.uk
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