Henderson Global Investors’ Ainslie McLennan (pictured) says investing in commercial property with inflation-protected leases is a good way for investors to protect their capital in real terms and continue to see a steady stream of income over the long-term. McLennan, co-manager of the five crown-rated Henderson UK Property fund, says around 20 per cent of total receivable rent from the properties within the portfolio is inflation-protected, meaning a good proportion of tenants are on leases which allow the rent to move in line with inflation.
"This helps to inflation-proof the portfolio," she said.
The leases are linked to the UK’s retail prices index (RPI). The threat otherwise, the manager says, is that rents will stay too low to be able to provide a steady and growing stream of income in real terms – something she says is a danger in such a low-growth rental environment.
"With inflation back on the radar it’s nice we have that protection," she said. "I think that’s very important."
"With commercial property, a large part of the total return is going to come from a steady income stream."
McLennan adds that commercial property should be seen as an attractive investment, particularly for more cautious investors, because the asset class has not been affected as much by the recent short-term swings in sentiment that have characterised the equity and bond markets.
In order to build a portfolio that will continue to provide a steady stream of revenue years down the line, McLennan says investors need to focus on both the sustainability of the property and the business that is utilising the space.
"You need to make sure the portfolio is placed in assets that are not only smart investments from a rental perspective but also that they’re not going to become obsolete in the future," she explained.
The majority of the £814.3m fund’s holdings are concentrated in greater London and the south-east, where McLennan says the team is finding the most value.
A major theme of the portfolio is retail warehouses, which McLennan prefers to the high street.
Advantages include the ability for consumers to use "click and collect" services, which are increasingly in demand, and potentially larger spaces to accommodate a fuller range of products.
The fund also holds a number of key chilled distribution units where food retailers use space to store their products before they are shipped.
"We’d like to invest more in this area if we could because these retailers are quite switched on," she said.
As businesses like Amazon and Ocado take a bigger chunk of the high-street business, McLennan says they present an opportunity for investors.
She adds among the key considerations when investing in warehouse space are the location of the facility and how it is equipped. While there are a large number of storage spaces, she says not all of them offer the proximity and efficiency needed by fast-growing online retailers.
Another key element of McLennan’s management style is that she vets the underlying businesses in the properties in the portfolio.
"You’ve got to be very focused on the businesses you’ve selected as your tenant base," she said.
"We focus very hard on the strength of the tenant and we want tenants that can continue to pay rent over the long-term."
"That has proved its worth because we’ve been able to pay a dividend that’s pretty high and steady – we’ve been able to keep doing it."
"You want to make sure if you’re going to be an income-oriented fund that you’ve got income."
Henderson UK Property is one of the highest-yielding funds in the IMA Property sector, paying out 4.5 per cent.
Like most property funds, the Henderson portfolio lost money in 2008; however, it didn’t shed nearly as much as the average fund in the sector. It also outperformed during the down market of 2011.
Year-on-year performance of fund vs sector 2008 to 2012
| Name | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) |
|---|---|---|---|---|---|
| Henderson UK Property | 6.02 | 0.12 | 8.56 | 7.26 | -22.29 |
| IMA Property | 12.54 | -6.04 | 13.41 | 14.44 | -30.12 |
Source: FE Analytics
The fund has lagged its sector average over one and three years, but it is a top-quartile performer within its direct property peer group over these periods.
Among the fund’s top-holdings are an office park in Windsor, distribution warehouses let to the Co-operative in Essex and Tesco in the East Midlands and a B&Q warehouse in Farnborough.
The largest weighting in the fund is to offices, at 35.4 per cent. The manager is currently holding 18.2 per cent in cash and cash-related assets.
The fund requires a minimum investment of £1,000 and has an ongoing charges fee (OCF) of 1.84 per cent.
This article was written in collaboration with and is sponsored by Henderson Global Investors.