Ross says that there is a lack of value in central London commercial property markets as prices have been pushed up by huge swathes foreign money looking for a home in the perceived safety of the Capital.
However, the manager says that one of the most interesting opportunities is in the area east of Kings Cross through Whitechapel and Shoreditch down to St Katherine Dock as, not only is it off the radar for most foreign investors, but it is also the home of the UK’s booming “techbelt”.
Ross says that due to the quirky nature of these tech and media companies, many of them are looking for less-traditional office space.
“In London, one specific area of good value is in the fringe areas. Today, the best buildings in London are the ugliest,” Ross explained.
“They are the ones you can refurbish and make space for the where the type of expanding tenants in the creative industries such as emerging technology companies and media companies etc. want to be.”
“They want to be in those sorts of quirky buildings where you have your slides, bicycle racks and table-tennis tables.”
For this exposure, Ross has been buying shares in property development and investment companies Derwent London, Great Portland and Helical Bar; all of which are listed on the FTSE 250.
According to FE Analytics, all three of stocks have beaten the FTSE 250 over the last 12 months with Helical Bar, in particular, performing well with returns in excess of 60 per cent.
Performance of stocks vs index over 1yr
Source: FE Analytics
However, Ross says they still offer good value because not only are all of those companies benefitting from the need for office space; it is an area which is attracting a younger generation which is increasing the number of bars and restaurant.
“The key is what is happening to rents,” Ross explained. “The likes of Derwent London, Great Portland Estates and Helical Bar are buying property where the rent is £25 a square foot around Old Street, for example, and refurbishing it – but keeping its quirky nature – and now those rents are moving up to £45 to £50 a square foot.”
However, Ross says he has invested in Derwent London, Great Portland Estates and Helical Bar in particular because they are the best in their classes.
He describes them as local real estate experts who understand their tenant’s requirements and the “extremely complicated” London planning rules.
The fact that all three have a cash heavy balance sheet is also a major positive, according to Ross.
“It’s a tricky art because you have got to work the planners, you’ve got to get change of use on a lot of the assets and it means capital expenditure.”
“You’ve got to have cash because it’s still very difficult to get development finance and development finance that is available is extremely expensive. That’s why these guys, with cash and that access in terms of finance, have a unique cost of capital advantage.”
Also, Ross says that all three of the management teams have a large stake in the business, which means their interests are aligned with their shareholders.
There have a number of fund managers – such as FE Alpha Manager James Thomson – who have been buying up shares in some of the UK’s leading tech businesses. However Ross says that the companies that are now residing in the “techbelt” are often more recent start-ups.
Ross launched his five crown rated Premier Pan European Property fund in July 2005.
According to FE Analytics, over that time the £93.4m fund has been the second best performing portfolio in the IMA Property sector and has beaten its benchmark – the GBR 250 Europe Index – by more than 10 percentage points.
Performance of fund vs sector and index since Jul 2005
Source: FE Analytics
Premier Pan European Property has also been top quartile and beaten its benchmark over rolling one, three and five year periods.
Like the majority of property portfolios, Ross’ fund had disastrous time during the financial crisis. For instance, our data shows the fund lost 23 per cent in 2007 and lost 40 per cent in 2008. However, it outperformed its benchmark in each of those years.
As his fund’s name suggests, Ross invests in both UK and continental European property companies.
He currently holds 44.9 per cent in the Europe ex UK region and 46.9 per cent in the domestic market.
Outside of London, Ross says he has been upping his exposure to the regions. For instance, he says there are a number exciting opportunities in the UK’s secondary and tertiary property markets, a view which is also held by Fiona Rowley, manager of the £2.3bn M&G Property Portfolio.
Ross is especially excited about companies that own regional retail parts with tenants such as Poundland and Dunelm Mill.
Premier Pan European Property has a yield of 2.96 per cent and its clean share class has an ongoing charges figure (OCF) of 1.04 per cent.
