Press centre

08 February 2010

Property investment companies: will 2010 see the revival continue?

AIC collates fund manager views on property investment companies

Property investment companies have had a roller coaster ride over the past few years.  However, since the really tough times during the downturn they have recently experienced a renaissance.  The average property investment company is currently up an impressive 52% over one year in share price terms, boosted by a narrowing of the discount from an average discount of 42% for the property sector a year ago, to 2% at 31 December 2009.  The average property investment company is down 40% over 3 years.  The Association of Investment Companies (AIC) has collated property investment company managers’ views on the sector and prospects for 2010.

Will the recovery continue into 2010?
Following the decline in property in 2007-2009, there was unprecedented growth during the last quarter of 2009. The managers believe this level of growth is unsustainable; however they are optimistic that a lower level of growth will be maintained in the future.
 
Michael Morris, manager, ING Real Estate Income believes that the upturn will continue but at a more subdued level: “The UK Real Estate Market witnessed a dramatic upturn in Q4 2009, as investors reappraised the attractiveness of the sector and a large wall of liquidity entered the sector, pushing up pricing, following falls of over 40% in the preceding two years.    Whilst I think a positive trend is likely to continue, pricing movements are likely to be far more subdued in 2010, with stronger occupational demand needed to keep this pricing momentum.  With all the uncertainties surrounding the UK economy generally, there are still risks to a straight line recovery, but whilst interest rates remain low, real estate will continue to look attractive, coming off a much rebased floor.”

Marcus Phayre-Mudge, manager, TR Property Investment Trust also believes that the period of growth and improved sentiment towards property is set to continue: “Property prices previously became dramatically over inflated on the back of generous credit markets and debt availability. The correction between early 2007 and the middle of 2009 was primarily a function of the withdrawal of credit availability. Buying interest evaporated. The subsequent economic downturn has obviously also put pressure on rents adding to the negative sentiment towards the sector.

“The second half of 2009 (and into this year) has seen a general stabilisation of values coupled with a marked improvement in the pricing of prime assets. The main attraction is the high level of income and at the prime end the distinct possibility of rental growth. Importantly, we expect this demand for income to persist. We believe investors will continue to focus on strong income streams well into the future.”

Colette Ord, Director, Investment Company Research at Numis Securities added: “We believe 2010 will be another interesting year for the property fund sub-sector, offering selective value and income opportunities for investors where discounts to NAV and /or well covered dividend yields exist. However, given the varying speeds of economic recovery internationally, close attention must be paid to the geographic and sector mix of each portfolio as well as the leverage position of each fund. Given the mixed outlook for property fundamentals, asset management skills will be a key differentiator.”

What is the attraction of investing in property?
In the current climate when interest rates are still at record low levels, the managers believe that property still offers a diversified asset class which will still continue to produce yields and should be considered as part of any portfolio with a long-term view. 

Michael Morris, manager, ING Real Estate Income said:  “As a sector, real estate offers diversification into a tangible asset class, with the UK market being the most liquid and transparent in the world.  Yields from real estate still look attractive against cash, which is positive if you think interest rates will remain low.  Equally, if you are concerned about inflation then there will be an element of inflation hedge though demand driven rental growth and the cashflow generated though rental income streams.”

Marcus Phayre-Mudge, manager, TR Property Investment Trust said: “We believe real estate is an attractive asset class as it is a long term real asset that offers relatively high levels of income return. Rental yields in excess of 7% in Europe and the UK are significantly ahead of the yields from European government or investment grade corporate bonds. In addition, rents are generally secured by relatively long term lease contracts which produce stable, transparent and predictable earnings. Listed property companies have recapitalised their balance sheets and reset their banking covenants to the extent that the majority are now on a sound commercial footing. Most are now buyers rather than sellers of property.”

Duncan Owen, manager, Invista Foundation Property Trust said: “Property should always form part of a well balanced investment portfolio based on its ability to deliver long term performance.  Our focus is on owning and acquiring assets that deliver a risk adjusted income return but offer the opportunity for capital appreciation through specific asset management activity.”

What types of investment are you looking at?
Michael Morris, manager, ING Real Estate Income said: “In the first instance you need to think about what investment route you are using to access real estate.  Different vehicles are priced differently and it is important to understand the impact of the frequency of valuations within the vehicles, gearing and nature of the underlying risks within the portfolio, all of which will affect headline pricing.   Investors also need to be aware of the difference between market price and valuation, as there can sometimes be a ‘lag’ between these, which may well affect expected returns.

“At a property level, whilst the area of the market that has seen the strongest recovery has been assets with longer term income, at this point there is better value to be found in assets with a shorter lease profile, where the pricing has been less affected.  That said; good opportunities are likely to be asset specific where one is confident with the underlying quality of property and the supply/demand characteristics of its local market.”

Duncan Owen, manager, Invista Foundation Property Trust said: “We concentrate on good quality assets let to strong covenants which are the sort of real estate fundamentals that are continuing to attract investors. During the recent downturn these were the sort of assets that continued to outperform the sector.”

Marcus Phayre-Mudge, manager, TR Property Investment Trust said: “Property companies with quality portfolios focused on primer assets, particularly those offering longer than average income streams.  Also stock which is coming to the market from ‘motivated’ sellers and will trade at a clearing price. Most quoted property companies are trading at discounts to our estimate of year end asset values.”

Annabel Brodie-Smith, Communications Director, AIC said: “It is encouraging to see property investment companies experiencing a rebound after the lows from 2007 to mid 2009.  The unprecedented growth in the past six months clearly cannot be maintained but for investors that take a long term view, property is an important asset to hold as part of a diversified portfolio.”

AIC Member Property investment companies share price total return on £100 (minus 3.5% expenses) to 31 December 2010

		1year	3year	5year	10year
Company	Sector
Average investment company		129.66	89.51	141.21	145.67
Average Property investment company		154.67	154.67	91.82
Property Direct - Asia Pacific Weighted Average
Property Direct - Europe Weighted Average		177.02	33.82
Property Direct - UK Weighted Average		157.82	65.86	69.27
Property Securities Weighted Average		142.84	63.19
Property Specialist Weighted Average		129.51
Macau Property Opportunities (AIM)	Property Direct - Asia Pacific	188.26	102.36
AXA Property	Property Direct - Europe	337.19	60.5
Eastern European Property (AIM)	Property Direct - Europe	94.27	54.24
Kenmore European Industrial	Property Direct - Europe	321.28	43.87
Sirius Real Estate (AIM)	Property Direct - Europe	135.59
F&C Commercial Property	Property Direct - UK	151.67	80.9
ING UK Real Estate Income	Property Direct - UK	254.39	58.01
Invista Foundation Property	Property Direct - UK	258.02	37.88	53.33
IRP Property Investments	Property Direct - UK	179.91	76.02	108.85
Standard Life Investments Property Income	Property Direct - UK	135.7	62.92	80.54
UK Commercial Property	Property Direct - UK	154.56	92.09
Henderson Global Property Companies	Property Specialist	183.4	55.25
ING Global Real Estate Securities	Property Specialist	225.97	68.72
TR Property	Property Specialist	130.11	62.83	126.63	420.43
TR Property Sigma	Property Specialist	157.07
Camper & Nicholsons Marina Investments (AIM)	Property Specialist	124.38
MedicX	Property Specialist	94.91	79.21
Vinaland (AIM)	Property Specialist	143.17	64.08

-Ends-

Notes to Editors
The Association of Investment Companies was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 347 members and the industry has total assets of approximately £85 billion.

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