Recent years have seen investors flock into property funds on the back of strong returns but the more volatile conditions of 2015 have seen these dampen significantly.
The average IA Property fund made a 13.12 per cent total return in 2014 while the peer group was one of the Investment Association’s best selling sectors of the year. This popularity has been maintained, as the sector took in £293m in fresh money in July, making it the fourth highest selling sector of the month.
When it comes to direct property funds as opposed to those investing in property equities, gains were slightly lower in 2014 but at 11.03 per cent were still much higher than the 1.18 per cent total return posted by the FTSE All Share.
This year was tipped for more of the same. At the start of 2015, for example, Capital Economics said: “The outlook for commercial property returns has improved over the past quarter and we now expect UK property to deliver double-digit returns in both 2015 and 2016.”
But as we approach the final quarter of 2015, the picture looks a little different. IA Property is up just 0.80 per cent although UK bricks and mortar funds have made 5.17 per cent; by comparison, the FTSE All Share is down 4.61 per cent.
Performance of sectors and index over 2015
Source: FE Analytics
One direct property fund has managed to achieve double-digit gains this year, although it’s doesn’t invest in commercial property – TM Hearthstone UK Residential Property, which is managed by David Gibbins.
As its name suggests, the fund is invested in private rented sector housing across mainland UK regions and has the aim of capturing growth in UK house prices, along with providing an element of income. It has around 40 per cent of its portfolio in London housing, which a significant overweight to its LSL Acadata House Price Index benchmark.
Scottish Widows HIFML UK Property follows with an 8.67 per cent return, while L&G UK Property made 6.48 per cent and Aberdeen Property Trust is up 6.26 per cent.
However, two direct property funds are in negative territory – Aviva Investors Property Trust has lost 1.86 per cent and Host Capital UK Student Accommodation is down 1.12 per cent.
Although property funds look to be some way off the double-digit gains they were tipped for, fans of the asset class point out that the average UK bricks and mortar fund has still been stronger than UK equities or government bonds this year. The Barclays Sterling Gilts index is up just 1.77 per cent year to date.
Another point is that UK property funds are outperforming those focused on international real estate markets. A look across the IA Property sector shows a number of Asian, European and global property funds have lost money over the year to date.
Performance of funds and sector over 2015
Source: FE Analytics
Alan Sippetts, investment director at Heartwood Investment Management, said: “UK commercial property had a strong run in 2014 and it led some investors to question whether valuations were nearing the top of the cycle. Earlier this year, we took a more contrarian view, believing that UK commercial property was positioned to perform well again in 2015.”
“Year-to-date returns are so far confirming our view, but what has been particularly striking is the UK’s outperformance versus the rest of the world. Why has this been the case?”
“We have consistently held the view that UK commercial property would be supported by three drivers: international investor demand, income and rental growth due to low vacancy rates and limited supply. These factors are playing out this year and, moreover, we believe these trends can continue.”
No direct property funds have been placed on the FE Invest Approved List, although there are three that invest in property shares and HSBC Open Global Property, which takes a fund of funds approach to the asset class.
Square Mile, on the other hand, has a ‘recommended’ rating on M&G Property Portfolio, Henderson UK Property, L&G UK Property, Aviva Investors Property Trust and Standard Life Investments UK Property. All of these funds invest directly into commercial property.
The lacklustre returns from property and the general ramp-up in volatility across markets this year is also creating opportunities in the closed ended space. Returns here have been stronger and with an 8.97 per cent total return year to date, the Property Direct UK sector could well see double-digit gains this year.
According to the AIC, the average investment trust in the sector is trading on a 5.2 per cent premium to net asset value (NAV). This is down from the one-year average premium of 6.9 per cent and some members of the peer group have moved onto a discount.
Performance of sector over 2015
Source: FE Analytics
Colette Ord, director of investment companies research at Numis Securities, said: “Recent market turbulence has eroded some of the gains made over the last year. Over the past month, Picton Property Income and F&C Commercial Property Trust have seen the biggest declines of 5.4 per cent and 5.1 per cent respectively, despite little newsflow from either fund. Average declines across the sector as a whole were 0.4 per cent, although this compares favourably to the UK REITS index, which declined 4 per cent over the same period.”
“There are now three funds in our peer group which are trading on a discount to our estimated NAV: Picton Property Income, Schroder Real Estate Investment Trust and UK Commercial Property Trust in spite of continued progress with asset management initiatives and an anticipation of further NAV growth in Q3.
“More generally, given the current low interest rate environment, improving occupational trends and sensible balance sheets, we would expect the return characteristics of the sector to remain in demand and suggest that share price weakness could offer an attractive entry point for investors seeking income.”
