As Columbia Threadneedle Investments prepares to join Aberdeen Asset Management and Canada Life in re-opening its £1.4bn property fund, doubts persist over the future of the UK’s commercial property market.
The Brexit vote brought three years of double-digit returns from UK property investments to a juddering halt. By early July, panicked investors clamouring to withdraw their cash forced seven vehicles to be “gated” – preventing redemptions because fund groups couldn’t hope to sell their directly-owned, illiquid assets fast enough to keep up with demand from fleeing investors.
But was this crisis of confidence overblown?
Investment in UK property fell in August
Recent data paints a bleak picture. Investment in commercial property fell again last month. Offices, retail locations and hotels were hit particularly hard, with the total deal value down by more than 25 per cent compared to July – at just £1.57bn. July’s figure had itself been crimped by the vote to leave the EU the previous month.
Capital Economics’s Ed Stansfield pointed out that the only time that deal activity had been lower in value terms for an August had been in 2009, at the height of the credit crunch. The 55 deals done last month was the lowest volume ever recorded for an August.
Tenants aren't going anywhere
“But investors should look at the fundamentals,” says Don Jordison, managing director of property at Columbia Threadneedle. “Which in property’s case means tenants.”
Indeed, 90 per cent of the occupants of the Threadneedle UK Property Authorised Investment fund’s properties who have faced a contractual break point since 24 June have stayed, says Jordison. Darius McDermott, managing director of Chelsea Financial Services, points to the fact that the average property sale made by the fund is just 1 per cent lower in value than before Brexit. The current yield is considerable at 6.6 per cent.
“There was a huge emotional component to the referendum,” says Jordison. “Property suffered because it’s such a tangible investment. But UK property is more than a few skyscrapers in the City. Our occupiers are in shops, shopping centres, retail warehouses, offices, manufacturing and distribution centres across the UK.”
Brexit may be simply providing a correction. “It has put the microscope on property pricing,” says Gerry Ferguson, manager of the Aberdeen UK Property fund. “Today, it’s all about asset allocation. People invest through platforms rather than individually. My impression is that people were holding a slightly overweight position in property a bit longer than they had anticipated, given that interest rates and gilt yields are so low.”
According to Jordison, the 5 per cent increase in stamp duty delivered in the March Budget made non-institutional investors think that the market had peaked. “People in daily-dealt funds saw their investment go down 1 per cent. Over the next few months, high net inflows turned to outflows, which meant that these funds – ours included – had to swing their price 6–7 per cent.” When the referendum struck, confidence was already at a low ebb.
A source of diversification and income
A repeat of the commercial property exodus which accompanied the financial crisis was always unlikely.
First, leverage ratios comparing funds’ debt with total assets are much lower now than they were during the crisis, when large scale redemptions from UK property funds last occurred.
While UK investors may have taken pause this summer, appetite from overseas investors has actually increased. Net investment from abroad was higher last month – at £855m – than the three which preceded it, as weaker sterling has given foreign buyers greater purchasing power in the UK.
Moreover, commercial property continues to offer diversification and income at a time when other asset classes don’t.
Nevertheless, Ferguson advocates a cautious approach. He admits that the occupational market in London and the South East has come under some pressure, and there will be a knock-on effect for rental growth prospects over the next couple of years. “But there has also been the emergence of some equity capital from America, and London will continue to be very much a global city.”