Investors fall in love with property again

12 January 2010

It’s official: investors and fund managers have fallen back in love with property and after suffering sharp losses since May 2007, property funds are looking much healthier again.

Sales went through the roof at the end of last year and funds are finally making money for their investors.

Indeed, investors now appear to prefer real estate to equities and bonds. Property was the top selling sector in both October and November last year, according to Investment Management Association figures.

The sector saw £417 million in net retail sales in November, the highest achieved since March 2007.

It’s a marked change since the beginning of 2009, when property ranked 28th out of the 34 sectors, with net outflows of £35 million.

With new money flowing in and opportunities to snap up assets, property fund managers are getting busy again.

New Star UK Property Unit Trust has just bought its first property in more than two years. The £741 million fund has acquired a retail unit in Chichester, which is let to the House of Fraser department store until 2039. It was bought for £10.5 million and has a yield of 6.8%.

"This property, in one of the South East’s most affluent towns, further boosts the average lease length across the fund of over 10 years and is reflective of the high quality assets held in the portfolio," says Marcus Langlands Pearse, co-manager of the fund.

He adds: "The UK property market is now in full recovery mode with yields on prime properties hardening rapidly."

The fund was up 17% over the past six months, and boasts an initial yield of 7.6%.

Adrian Lowcock, senior investment adviser at Bestinvest, is currently bullish about property. He turned positive on the asset class in July last year, as commercial property prices reached a bottom.

"Considering the recent movements in valuations of property and the continued uncertainty on the strength of the economic recovery, we favour prime property assets (such as those with long leases, secure tenants and low vacancies) and where there is scope for asset management opportunities to increase rents," explains Lowcock.

He recommends the New Star fund and M&G Property Portfolio.

"We prefer actual bricks and mortar funds, rather than funds that hold shares in property companies. Some funds have recently had significant inflows and with cash being a drag on performance, we prefer funds with less than 20% cash."

According to Ian Womack, global chief executive for real estate at Aviva Investors, UK property is rallying most strongly globally, although other countries are picking up too.

"In Europe, Paris has turned around decisively and in Asia, Hong Kong and Singapore are attracting increased investor demand. Even in the US there are tentative signs of market stabilisation," he notes.

Womack agrees that things are looking up for property, compared to the grim outlook a year ago: "Investors that were actively selling assets in 2008 have shored up their balance sheets over 2009 and are either no longer selling or actively looking to invest in real estate.

"Reits’ fortunes have improved with equity raisings and the rally in their share prices. Property unit trusts are seeing investment inflows again and in the UK, overseas investors have been encouraged by the decline in sterling."

Looking ahead, Womack believes the property rally will continue to run this year "barring any further shocks in the wider economic backdrop". However, he warns that rental decline could also continue so investors should be cautious.

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