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UK property in a “sweet spot”: Three funds for income investors

03 November 2014

Property has returned to the attention of investors this year so FE Trustnet looks at which ones are rated highly from an income point of view.

By Gary Jackson,

News Editor, FE Trustnet

UK commercial property is expected to continue to make steady returns over the coming years - mainly through rental growth - so which funds are best placed to pass these on to investors?

Macroeconomic forecasting consultancy Capital Economics says UK commercial property capital values could grow by around 12 per cent in 2014 but this means the gains expected in 2015 and 2016 are likely to be smaller.

The group also forecasts that rental value growth in the commercial property sector will be “sure and steady” over the coming five years. However, yields in the sector have fallen sharply over the past few months as more investors return to the asset class.

Performance of sector over 3yrs

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Source: FE Analytics

The latest figures from the Investment Management Association show IMA Property was the second best-selling sector in September with net retail sales of £315m. The sector has been popular with investors across the course of the year and topped the sales charts in May.

Capital Economics said: “The stronger economy and rising investor confidence have also been behind the falls in yields. But this momentum has effectively ‘brought forward’ returns from future years, given that yields will presumably have a natural floor and interest rates are set to start rising next year, albeit slowly.”

“So after a strong yield-driven gain in capital values this year, a rise in rents is likely to be the sole contributor to higher capital values next year.”

“However, for now the commercial property market’s ‘sweet spot’, with rents rising and yields falling, is probably not over. Total returns should be close to 20 per cent this year and about 10 per cent in 2015.”

Given the prospect of rising rents in the sector and the search for yield driving up the price of most assets, commercial property has returned to the attention of income investors. In the article below we use the FE Research team’s recent income study to highlight a number of property funds that could prove attractive.



Ignis UK Property

The property fund that topped the FE Research income study is George Shaw’s £1.4bn Ignis UK Property fund, which scored 261 points out of a possible total of 300.

The income study rates funds out of three categories - yield, dividend stability and downside protection. Shaw’s fund scored 97 for both dividend stability and downside protection while picking up 67 points for yield.

From a total return point of view, Ignis UK Property has returned 39.25 per cent over five years, placing it in the IMA Property sector’s third quartile. Over the same time frame, it would have paid out £204.49 on an initial investment of £1,000.

Performance of fund and sector over 5yrs

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Source: FE Analytics

Shaw has 32 per cent of his portfolio in London, with another 28 per cent in the rest of the south-east. Some 19.9 per cent in the north-west and Scotland, 14.6 per cent is in the Midlands and Wales, and 5.5 per cent is in the south-west and East Anglia.

In his latest update, the manager said: “Investor appetite for commercial property is likely to remain strong and there has been increasing activity outside London. In the medium term, income and the active management of the fund's income stream will continue to be a key factor in driving performance.”

Ignis UK Property has a clean ongoing charges figure of 0.76 per cent and currently yields 3.31 per cent.



Schroder UK Property

The £1.6bn Schroder UK Property fund came in second place in FE Research’s income study, scoring 238 points out of 300. It picked up 90 points for yield, 48 for dividend stability and a full 100 for downside protection.

The fund, which is managed by James Lass and resides in the IMA Unclassified sector, aims for a return of 0.5 per cent a year over the IPD UK Pooled Property index over rolling three-year periods.

Its most recent factsheet shows its largest allocation is to central London offices with 16.4 per cent of the portfolio held in this type of buildings. It also has 16.3 per cent in industrial buildings in the south-east and 13.2 per cent in south-east offices.

FE Analytics shows the fund has returned 62.66 per cent over five years and has risen 15.57 per cent over the year to date.

Over five years the fund has also paid out £255.66 in income for an initial investment of £1,000.



Threadneedle UK Property

Don Jordison’s £789.9m Threadneedle UK Property fund came third in the FE Research income study with a score of 236 out of 300.

It was awarded 80 points for its yield, 48 for dividend stability and 65 for downside protection.

Over five years it has underperformed the average fund in the IMA Property sector with a return of 23.49 per cent against the peer group’s 42.93 per cent. However, it sits in the sector’s first quartile over one year as well as over three and six months.

Performance of fund and sector over 5yrs
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Source: FE Analytics

In terms of income, it has paid out a total of £215.85 on an initial investment of £1,000 five years ago.

The fund is overweight industrial properties, shops and retail warehouses, with underweights to offices. Its latest factsheet says it has 53.8 per cent of its portfolio in properties in the south of England, making this its largest regional play.

Threadneedle UK Property has ongoing charges of 0.81 per cent and yields 4.50 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.