This stands in stark contrast to direct property investments, which tend to lag about six months behind the share price changes that come about more quickly on the basis of expectations among investors in listed securities.
Thus Vicky Watson, investment director, European Equities and fund manager of the SWIP European Real Estate fund notes that her fund made some strong gains into August on the basis that the wider market now saw that property was no longer a general euphemism for "investor Armageddon."
Performance of SWIP European Real Estate fund over 3-mths
Source: Financial Express Analytics
"There are two aspects of return from property – growth and income," Watson says.
"For a long time before the downturn started it was a capital growth story because they were driving returns. One of the reasons property did so badly was concern over capital declines. We’ve seen property fall heavily from March 2007 – 2.5 years. While some of the recent recovery [in securities property investments] may look astonishing, it’s not really when you look back at how far property has fallen compared to the rest of the market."
"Equity markets as a whole trade off sentiment. If there is sentiment that things will fall indefinitely, which was the feeling with property values, they will keep falling. What’s happened in the past few months is we’ve realised there is a floor, that we are not going into a giant depression, and actually things are oversold, so there’s a bit of catch up momentum going on."
"That’s good because it gives some feel for net asset values. It now looks like we’re seeing some signs of stability. We’re seeing some transactional evidence in the UK."
From the point of view of running property-related money on assets across Europe, including the UK, there are some notable differences in the way separate markets have performed.
Watson says it is the case the UK property market has experienced a much sharper contraction in property asset values, at least in part because of the much higher levels of transparency, for example, because of a more open and transparent valuation system.
Continental markets have been increasing in transparency over the past decade, but still lag. So, where writedowns in the UK may have hit 40 per cent in the property slump, on the Continent they have been about 10 per cent. By contrast, expectations are that property asset values could bounce more sharply in the UK.
On the income side, property companies are benefitting from falling interest rates against steady rates of rent. This has opened up a margin benefit, particularly for those property companies that pay floating rates of interest. And there is evidence that where rents are coming up for renewal, rates are at the very least remaining stable, if not growing in many cases, Watson says. The outlook for yields improving into next year is not great, but then neither is it as dire as some expected previously.
Watson says she prefers to look to retail – shopping centres – than office space for the interesting gains in the market currently.
"By a quirk a lot of the office focused companies listed at a bad time. They acquired a lot of assets at the peak. That’s not to say that one day they won’t be interesting. For now they are more highly geared and in terms of where values will go they’ve probably got some further downward momentum on the Continent."
"It’s difficult to say, however, as one rule doesn’t always fit everything. On the whole I’m out of favour with the office market, more focused on the retail markets. One reason is the active asset management potential. The way you can control that site and make it a more exciting place to be."
Retail in the UK remains a challenge, partly because landlords face the decision of cutting rents to certain tenants in order to avoid empty units in shopping centres. The Continent has yet to see any substantial retail failures, Watson says, so it remains a slightly different story. It is also different for technical reasons, such as the way shopping habits in the UK tend to mean the so-called anchor tenant in a shopping centre will be a retail name, whereas on the Continent it will tend to be a supermarket name – hence, for example, people pushing trolleys of food around shopping centres in France.
Watson says a property securities fund can be thought of as a diversification play against direct property investments, particularly where investors are looking for ways to invest at different stages in the property market cycle.