Avoiding central London and focusing on strong investment stories outside of the capital has proved a prudent strategy amid a Brexit-inspired downturn in rental income in the capital, according to BMO Global Asset Management’s Guy Glover.
Glover, who oversees the £495.5m F&C UK Property fund – a property authorised investment fund or PAIF – said while many investors have piled into central London locations such as the City or the West End since the Brexit vote, its focus on “resilient locations” and properties outside the capital has paid off.
“Although we had some years of underperformance as a result of avoiding the City and the West End, the fund is now nicely positioned to benefit,” Glover said.
“We’ve been buying in places that are ‘quite defensive’ such as Aberdeen, Cornwall, and in ‘doughnuts’ around London. That way we get the London benefits without exposing to all the risks of what’s going on in central London,” he explained.
Source: Cluttons
Glover added: “We’ve seen rents across London fall between 5 and 10 per cent and, as a consequence of Brexit uncertainty, people expect there to be a rather muted occupied market within London.
“No one quite knows where rents will go but there will be a little bit of market correction to be expected.”
“I am not saying that London is going to fall dramatically, but there is definitely going to be a bit more volatility in the market,” he explained.
While acknowledging the need to keep an eye on what goes on in the capital’s property market because the city “has always a way of reinventing itself”, the F&C UK Property fund manager said there were other attractive geographical areas he is considering.
When it comes to the challenges the UK divorce from the EU may pose to the country, Glover said that, while it cannot be ignored, Brexit is not the only driver of his positioning.
“We look at it but we have to see through the immediate Brexit impact,” he explained.
Instead, the focus is on aspects related to what happens in the buildings themselves and other UK political uncertainties.
“Looking at what happens within the building will give you a better idea about the impact of Brexit than the more obvious stories you are going to be reading in the newspapers,” Clover noted.
Other than Brexit, the manager has been keeping an eye on issues such as the potential for a change of government in the UK to a left-wing administration and also sought to keep an eye on what geopolitical trends might have on the UK property market, such as the protectionist policies favoured by US president Donald Trump.
While keeping an eye on more macro themes, however, Glover has continued to focus on the underlying factors driving property valuations.
One of the latest additions to the portfolio was a retail property operated by Matalan in Romford. Despite concerns over the state of the retail market in the face of increased competition from online, Glover said that the sector remains resilient.
Another position in the fund is in a gas turbine industrial property in Aberdeen, another example of a holding where he has concentrated on fundamentals.
"The company said they have a good gas turbine industry in Aberdeen, the only place in the world they have that particular type of turbine,” he explained.
“Therefore, we decided we are going to continue to support it, even though is mainly based in the UK.”
Indeed, Glover’s approach to management has ensure that the fund has been able to ride out some more challenging conditions more recently,
Performance of IA Property sector over 3yrs
Source: FE Analytics
Following the Brexit vote a number of funds suffered significant outflows as investors became concerned over the potential impact on the property market and were forced to suspend redemptions. Some fund managers were even forced to sell holdings to raise cash.
However, with a different liquidity strategy to some investors – with around 10 to 20 per cent cash but avoiding having a very dominant investor controlling all the liquidity of the fund – helped it weather the sell-off.
“We are slightly different from other property funds,” Glover explained. “A lot of them have been ripped out of life insurance companies where they had some commercial real estate assets and they said: we’ll make a new fund and have a dominant investor in there.
“But we decided to avoid having a very dominant investor controlling the liquidity of the fund, as we are required to hold cash in order to fight the day-to-day liquidity.”
“If you have a very big investor there, they can sell out of the fund and you could have fund suspension but we thought we don’t want a big investor or lots of multi-managers.”
The manager noted that the £495.5m fund saw “quite a lot of positive flows” after the Brexit vote in June 2016, when as a result of the referendum many property funds were suspended.
Despite a fall in performance following the EU referendum, F&C UK Property has delivered a total return of 43.31 per cent since Glover joined the fund in 2010, although it lags the average IA Property sector peer’s gain of 66.75 per cent, although it is home to a wide range of strategies covering different asset classes and geographies.
Performance of fund under Glover
Source: FE Analytics
F&C UK Property was relaunched in 2010 and is designed for investors looking for steady income with capital growth.
Glover added: “The fund is not there to be the most exciting part of the portfolio, is not there to deliver 20 per cent returns in one year, is there to provide an income return, a little bit of capital growth over a period.”
The fund is also included on the FE Invest Approved List, with analysts noting its focus on growing the dividend.
“There are advantages of being a smaller player in direct property,” FE analysts noted. “The team are cash buyers and can close a deal very quickly compared to their peers. They also have the liberty to choose among assets that are too small for big funds to be worth considering.
“The fund’s robustness was tested and proven during the Brexit turmoil in the summer 2016, as it did not suspend dealing nor had to sell property to raise extra cash.”
The fund has an ongoing charges figure (OCF) of 0.86 per cent and a yield of 3 per cent.