The property sector became more attractive after an expected post-referendum UK economic slowdown failed to materialise, according to Whitechurch Securities’ Ben Willis, who said the team has moved back into the asset class over the past six months.
With bond and equity prices trading at extreme valuations thanks to ongoing quantitative easing measures and ultra-loos monetary policy, there has been very little for investors to get excited about in the current environment, said the Whitechurch head of research.
Indeed, as the below chart shows, the Bloomberg Barclays Global Aggregate Index and MSCI All Countries World have risen by 114.96 and 135 per cent over the last decade respectively.
Performance of indices over 10yrs
Source: FE Analytics
With interest rates reaching historic lows (and still low despite the latest hike by the Bank of England), savers and risk-averse investors have been pushed into higher risk asset classes to generate a return on their capital.
While traditional asset class have done well over the long term, alternatives have recently become more popular, with the income offered from asset classes such as infrastructure, property and the growth of more specialist areas such as healthcare and technology attracting a lot of new money.
However, this can have its downsides if sentiment changes, as evidenced by the property sector last year when many of the open-ended property funds had to temporarily gate to stem the tide of outflows in the wake of the UK’s decision to leave the EU.
Indeed, as the below chart shows, the funds that focus solely of physical property (as shown by the bespoke IA Property Bricks & Mortar sector) lost an average of almost 5 per cent from their peak in May to the bottom in July.
Performance of sector over 2yrs
Source: FE Analytics
But the sector has been on a decent run since then and yields remain attractive compared with savings accounts, bonds and some equities.
As such, investors have returned to the sector which is up 9.43 per cent over the past two years as property prices have proven to be more resilient than initially anticipated.
Whitechurch’s Willis said the team’s decision to move back into property is “the biggest move in terms of an asset allocation decision that they have made over the last six months”.
“There is so little to get excited about but the one move we have done is we have moved back into property,” he explained.
“We reallocated to property purely on income and the relative attraction of the yields and the fact that it is displaying its usual lack of correlation to equity and bond markets.”
Willis said the team reduced their property holdings at the end of the first quarter of last year by around half and then post-Brexit, when the mad rush for the door began, sold out completely.
“That was more because of liquidity issues as we knew there was going to be a run on the funds and didn’t want to get locked in,” he noted.
“Since then, obviously the post-Brexit bad news for the economy didn’t really materialise and so it was just a liquidity issue rather than being a fundamental issue for property.
“Property managers realised that it wasn’t going to be the doom and gloom they thought it was and capital values have stabilised and income yields are still attractive – particularly against government bonds.
“So we have looked at ones that handled the liquidity crisis well and have selectively gone back into a couple of funds in that area.”
As such, he said the team has gone into two property holdings: the £428m F&C UK Property fund run by Guy Glover & Julian Smith and the £544m Kames Property Income fund managed by David Wise & Richard Peacock.
Performance of funds vs sector over 2yrs
Source: FE Analytics
“Those two were the only ones that didn’t sell any properties. I think this was because they had a smaller client base and owned smaller more regional properties,” Willis said.
The draw to funds like these, he said, is that they are smaller and more nimble, meaning that they were able to react differently last year to some of their larger peers. 
Additionally, due to their size, many of the large institutional investors, who were among the chief sellers last year, were unable to invest in the funds.
“A lot of the big institutions, who caused the liquidity to dry up, were invested in the big funds and couldn’t invest in these funds because they allocate a lot of money and so were pulling out a lot of money from the big funds hence why you saw the run on them,” the head of research said.
“These funds, because they are smaller, much more agile, have a smaller shareholder base and less allocation per shareholder in most cases, while they obviously suffered from price swings their liquidity buffer was fine.”
“They had to use up some of that liquidity buffer but they weren’t forced to sell any properties and were the only two open-ended funds that didn’t.”
As well as this, he said that another attraction is the regional focus of both funds, with the Kames fund investing in predominantly commercial property in the north of England, while the F&C fund is largely invested in the south-east and south-west.
Due to their size, for example, neither fund can afford overexposure to some of the large ticket buildings in central London – an area Willis is keen to avoid.
“They have got more a more regional focus and we don’t really want any exposure to London at all because it is massively overpriced, yields are particularly low,” he said.
“I am not saying there is an imminent London property collapse but it just looks unattractive from an investment point of view and we would like to own funds that avoid that area of the market, or if they are going to buy there they will buy selectively based on value and what they can generate.”