At the start of 2015, some commentators were tipping property to deliver another year of double-digit gains but the lacklustre performance of funds in the asset class may be casting some doubt over this outlook.
FE Analytics shows the average IA Property fund is up just 1.83 per cent over the year to date, just creeping ahead of absolute return funds by 3 basis points. The FTSE All Share, meanwhile, has posted a 7.30 per cent gain.
Since the start of the year, property has trailed behind numerous sectors within the Investment Association universe, including IA Global Emerging Markets, IA Flexible Investment and IA Technology and Telecoms.
As shown in the graph below, property has managed to beat sectors such as IA Sterling Corporate Bond and IA UK Gilts, both of which have made losses in 2015 as the bond market sold off.
Performance of indices in 2015
Source: FE Analytics
This result is perhaps a far cry from what many expected for this year, with numerous financial experts believing that property would continue to rally throughout 2015.
In February, Coutts’ Stephen Rees said that following a strong 2014, he expected commercial property in particular to continue to perform well.
“In a world of rock bottom interest rates, the high yields of UK commercial property have captured the attention of income-starved investors,” the head of real estate said. “But with initial yields – annualised rents expressed as a percentage of property value – now below 5.5 per cent and possibly falling further, has the asset class had its day in the sun?” “We remain positive on UK commercial property – though it might be more realistic to expect rental growth to play a bigger part then initial yields in determining total returns. And asset selection will be even more important in 2015.”
In May this year, Apollo’s Ryan Hughes (pictured), Parmenion’s Meera Hearnden and SG Wealth Management’s Neil Shillito all agreed that there is plenty of value left in property to keep the sector going strong throughout 2015.
“It is definitely a more expensive asset class to manage, but if you’re still talking about a net return of maybe 7 or 8 per cent for this year after charges, then I think that’s still a very healthy return and the charges shouldn’t put investors off,” Hughes said.
“As always, you need to think about the impact of those charges and make sure that you’re getting a fund that’s of sufficient quality to justify the charges that you’re paying.”
While these returns are still possible, the fact that we’re almost halfway through the year and the IA Property sector has returned just 1.83 per cent makes these high single-digit returns seem less likely.
What’s more, when so many other sectors are pipping this performance to the post, it could be challenging to find a case for investing in property when stronger gains can be made elsewhere.
However, Laith Khalaf, senior analyst at Hargreaves Lansdown, doesn’t believe that the recent weaker returns on property should necessarily be a reason to sell.
“I don’t think [property] has been a particularly bad place to be,” he said.
“The reason that people have invested in property is probably not so much for capital growth but for income and also for diversification. If you look at traditional assets that people go into to diversify their equity portfolio such as bonds, corporate bonds and government bonds, because these are trading at such high prices I think that has driven investors to focus more on alternatives and property is a natural investment to think about.”
“There are issues with investing in property, such as low liquidity and high costs, but it gives the diversification element that people are looking for, especially in a world where interest rates are at half a per cent and bond yields are at 2 per cent.”
Darius McDermott, managing director of Chelsea Financial Services, is very happy with the way the property funds in his portfolio have been doing and says that investors shouldn’t sell out of the asset class yet.
The two funds that the team at Chelsea particularly like are F&C Real Estate Securities and Premier Pan European Property, which have both outperformed the IA Property sector average almost four times over since the start of the year.
However, it’s important to note that these funds invest in property shares rather than bricks and mortar, thereby offering the potential for higher gains but also higher volatility.
The funds’ performances are impressive over the longer term, with F&C Real Estate Securities returning 117.09 per cent and Premier Pan European Equity returning 111.16 over five years, compared to the sector average’s return of 44.26 per cent.
Performance of funds vs sector over 5yrs
Source: FE Analytics
“Property has been doing well now for a couple of years. Property equities in an upcycle should outperform and clearly that’s what has happened,” McDermott said.
“I think we’re nearer to the end of the cycle on property rather than midway through it, but I still think that, subject to the broader equity market not tanking, property securities will do well for another year or so.”
There are a number of property funds that have managed to deliver healthy returns over the years and have won applause from analysts.
A prime example is HSBC Open Global Property, which is a fund of property funds and has outperformed the IA Property sector over one, three and five-year periods, as well as over the last six months.
Performance of fund vs sector over five years
Source: FE Analytics
The £173m fund, which is a fund of funds that focuses on property, has made it onto the FE Research Select 100 list due to FE Alpha Manager Dr Guy Morrell’s vast experience of property markets and his strong track record.
The FE Research team said: “FE appreciates the fund’s approach as, in keeping with HSBC’s global philosophy, it offers exposure to property markets across the world, not just in the UK. Furthermore, its preference for investments that are easy to sell means it can react quicker to changing conditions.”
“The focus on finding the right local expertise makes taking a global approach to property investment a more achievable strategy, giving the team access to experts in every region. The main driver of performance, however, remains its capacity to define the right investment themes at the right time. The fund has done well so far and its process gives it a good chance of keeping up the good work.”
HSBC Open Global Property has a clean ongoing charges figure (OCF) of 1.38 per cent and yields 1.69 per cent.
Another property fund that has performed well is Henderson UK Property, which is one of just a handful of property-specific investment vehicles that has been recommended by Square Mile.
Out of the other recommended funds, which include Aviva Inv Property Trust, M&G Property Portfolio and Standard Life Investments, Henderson UK Property has achieved the best returns over three, five and 10 years.
The £3.6bn fund has failed to outperform the IA Property sector average over three, five and 10 years, although this is because it invests in physical assets rather than property shares.
Performance of fund vs sector over 1yr
Source: FE Analytics
The fund, which is managed by Marcus Langlands Pearse and Ainslie Mclennan, offers investors a smoother ride than its average peer, producing a top-quartile annualised volatility of 4.25 per cent over five years.
Square Mile said: “[This is] a well-managed portfolio of commercial property providing income and the potential for capital growth. The fund managers are experienced and are able to draw upon the extensive resources within the substantial property investment business created by the alliance of Henderson's real estate business and TIAA-CREF [Teachers Insurance and Annuity Association – College Retirement Equities Fund].”
Henderson UK Property has a clean OCF of 0.84 per cent and yields 3.3 per cent.