Property investment trusts, meanwhile, are trading at wide discounts to net asset value (NAV) with the average for property direct UK trusts at 56.9 per cent compared to their historic average of 42.7 per cent, according to WINS Investment Trusts data as of 26 March. Trusts investing directly into European property are on an average 88.5 per cent discount, in contrast to a historic 62.9 per cent average. Investment trusts based on property equities are faring better, today trading at 30 per cent discount to NAV, according to WINS, compared to a 24.2 per cent historic average.
It is for this reason that Financial Express Research analyst Rob Gleeson says for retail investors direct property investment trusts are better value than those investing in property securities. He argues that commercial property prices have been driven down by lack of liquidity and lack of financing but prices will be restored.
However he warned that commercial property might fall further before it improves as deals cannot get done before credit is restored. But he reiterates that on a long-term basis property is under valued.
Although it is generally agreed that when commercial property prices hit their peak in the first half of 2007 they were over inflated, Gleeson thinks that they have now gone well under where they should be, noting that property is being sold at a 45 per cent discount to its 2007 peak.
Top property ITs - 1yr
Source: Financial Express Analytics
AIC property sectors compared - 1yr
Source: Financial Express Analytics
Institutional equity investors, meanwhile, are moving back into commercial property via real estate investment trusts (REITs). Clive Beagles, who runs the JOHCM UK Equity Income fund said real estate is the sector the fund has added to most over the last four to six weeks. This is via stocks such as British Land and Land Securities which he said offer a dividend yield of around 7.5 per cent with implied property yields across the sector of 8 to 10 per cent – an attractive level compared to base rates and corporate bonds – currently a very popular option with UK retail investors.
He said: “Commercial property is the most exciting sector in the UK at present. Many think property values will fall a further 30 per cent from here but I think this is unlikely.”
Beagles noted rising unemployment and bankruptcies among retailers mean voids will rise but said one had to consider the individual property company and its tenants.
British Land, for example, is succeeding in refilling offices at 1 & 2 Broadgate in the City, which were let to Lehman Brothers before the bank collapsed. And another of the fund’s holdings, Segro, lets to tenants including multi-national companies.
Beagles also said the UK, unlike some other countries, has upward only rent reviews which provides some protection for income. He adds that valuations are even more compelling with Segro trading at a 50 per cent discount to NAV and yielding more than 12 per cent.
Beagles said another area of interest is industrials because there has been no boom in this sector, with valuations rising just five per cent in five years.
Meanwhile, some REITs such as British Land and Land Securities have conducted rights issues, which they say leaves them with stronger balance sheets able to take advantage of distressed assets. Beagles expects such stocks will be strong performers from the current level once they go ex-rights, which has been the case with other rights issues over the last 12 months, for example Centrica at the end of last year.
However, it may not be a straighforward advance. Standard & Poor’s reports in its fourth quarter UK equity income report that Michael Gifford, who runs the Old Mutual Equity Income and Extra Income funds has moved out of real estate because he believes the outlook for commercial property will be negative for years to come. In contrast, Standard Life UK Equity High Income Fund manager Karen Robertson bought UK REIT Hammerson on the grounds that after its rights issue its 6.5 per cent yield is secure, though it did not account for one of this fund’s top ten holdings as of 31 January.
Alex Crook, fund manager of the Bankers Investment Trust, said in January that the trust will look to slowly reinvest in property companies which have reduced their gearing and done fund raisings. It had no property in its top ten holdings as of 28 February.
Bill Mott, who runs the Psigma Income Fund, recently reported that the fund has bought Hammerson, British Land and Land Securities due to concerns about the inflation which is likely to follow the government’s quantitative easing measures to reflate the economy. Mott said he decided to get exposure to property via these stocks because their rights issues will allow them to pay down debt and maybe buy property at the bottom of the market.
This means the fund has moved from underweight to neutral on commercial property, with this asset accounting for 1 per cent of the portfolio.
This comes as index provider FTSE launches its FTSE EPRA/NAREIT Global Indices on the grounds that notes that real estate remains widely recognised as one of the four primary core asset classes in institutional portfolios and represents nearly 50 per cent of global wealth.
Christopher Lees, manager of the Dublin domiciled JO Hambro Global Select fund, which launched last October, said there are attractive real estate companies across the globe whose share prices have suffered, and the UK and Japan are particularly interesting.
Tom McGrath of Apollo Multi Asset Management said that discounts to NAV are creating value across a number of UK investment company sectors though property vehicles stand out in particular. He held the Japan Residential Property and Macau Property Opportunities funds as of January.
Beagles adds that UK property companies could also benefit from overseas investors, for example, sovereign wealth funds.