It’s fair to say that we have had a fair run out of property. It has been one of our best performing portfolios over the past year and our portfolio has returned 23.1% since we began reinvesting in April 2013. As a reminder we had reduced property to zero in portfolios in 2012.
Property returns can, in very simple terms, be broken up into two parts. Rental income that a property generates and change in capital value of the property. Over time the rental yield of property is relatively stable however capital returns fluctuate. Over the past two years rising capital values buoyed by massive inflows into the market from foreign investors and retail investors into funds have been driving returns.
Although flows into property in general are still positive we may see them slow should other asset classes become more attractive or investors believe the returns may be lower.
We are less optimistic than we were as we believe that this level of growth is not sustainable and that we will move into a more normal rate of return driven by rental income for the asset class over the next 18 months.
There are a number of approaches property funds can take to increase the value and rental yield of their assets. Asset management is one way that our property funds are able to increase the value of their assets without relying on just increased demand.
It’s always nice to know what you’re investing in. A while ago I was lucky enough to visit the Corn Exchange in Manchester, a building steeped in history but much maligned by poor development and management in more recent years. It is now owned in part by all our clients through one of our property funds, Aviva Property Trust which has taken steps to redevelop the building.
The doors of the Corn Exchange will reopen soon as a dining destination packed with new restaurants for the people of Manchester. I for one am excited about Wahaca - Mexican market food and Pho – Vietnamese Street food restaurants. Further, there will also be a 114 apartment hotel as part of the £30m redevelopment.
Whilst initiatives like this are likely to be positive for the property funds and investors we must maintain a rationale for investment decisions.
A further consideration we take when looking at property is the likelihood that the funds we invest in reprice. As anybody that has bought or sold a house will tell you there are additional costs once an offer is accepted, this is much the same for commercial property.
Imagine the example of a fund that has inflows meaning it must buy property or build up cash (which would detract from returns), to cover the costs associated with the new investments many funds will set the unit price higher. For existing holders they will see a mark-up in the value of their investments. On the other hand though, if a fund sees outflows the fund could incur cost of sales. In this instance existing holders would see a mark down in the value of their investments.
We are always monitoring and assessing our portfolios to ensure the asset allocation is in line with our broader outlook for investments. Increasing exposure when we feel an asset class is more attractive and similarly reducing exposure if we become less optimistic in relation to other assets.
We have been making some changes to our property portfolio recently. We introduced a new property fund, Kames Property Income fund, which is more focused on secondary properties where the manager sees value due to the properties being too small for peer funds but too large for non-institutional investors. The fund is very different to our other funds and we hope that returns will be less correlated.
We have also taken steps to reduce our exposure from overweight to a more neutral position. Although this is a contrarian move to the market we are more comfortable at this level and we are happy to lock in gains from property.
We are also happy that the proceeds have been reinvested into a Defined Returns FTSE Autocall product with headline rate of 9.7%. This potential return of course depends on market conditions, but we feel this proactive asset allocation will benefit our clients.
This publication is for information purposes only and does not constitute advice, please consult your financial adviser. Investments can fall as well as rise. Past performance is not necessarily a guide to future.