A strong view about having ‘No strong view’ on UK commercial property

4th December 2013

Given that he is asked about it all the time, Psigma CIO Tom Becket outlines his views on UK commercial property below.

I’m sure people think that I’m lazy when we reply to the many questions we receive on UK commercial property (CP) with the response; ‘no strong view’.

One would hope that having to formulate constantly updated views on 11 core asset classes and very many sub investments would allow justification for a blind spot. In reality, we have learnt that property is an emotive subject and it is deemed imperative to have an opinion. Therefore to reduce the claims of idleness we have updated our view to ‘negative’.

I’ve got no strong bias on UK commercial property. Well that’s not totally true; I am vehemently against the illiquidity of ‘bricks and mortar’ funds and their swingeing fees. Memories of 2007 and the ‘gated’ funds loom large in my memory and I have seen little to suggest that the inherently illiquid nature of UK property funds have ameliorated. On the fees front, I think it is insane that investors should be forced to shell out for AMCs, ongoing charges, transaction fees and taxes for the privilege of accessing the asset class. 2%+ TER? You’re having an expensive laugh. These factors can only be justified if there is a genuinely attractive opportunity in real estate.

In terms of the current fundamentals it is nearly impossible to justify from an income perspective. While a UK CP fund’s property assets might yield circa 6%, you need to adjust the yield for the cash weighting (typically 20%) and taxes, meaning that the yield you get in your pocket is close to 4%. Better than govvies, (government bonds) but far less attractive than many other asset classes, particularly when adjusted for the illiquidity factor.

However, sometimes it is sensible to accept moderate liquidity risk, higher charges and an uninspiring yield if there is an obvious recovery potential in capital values. Here there is more cause for debate, in my unlearned opinion. In some sectors in some parts of the UK there is tangible evidence of the spare capacity being utilised and genuine signs of a recovery in prices. South-East retail would be an obvious current example. However, our research suggests that UK CP funds are an inefficient method of exploiting the opportunities on offer, due to their diverse nature.

So what are the alternative routes to a selective UK Commercial Property recovery? REITs are one such avenue, but the specialist companies are mostly over-valued and have been a primary beneficiary of the ‘close your eyes and hope for the best’ desperation for yield investment policy employed by many global investors. This is not a UK phenomenon, but rather a global epidemic, obliterating (for the most part) any blatant value in listed real estate markets. Finally, any investment in REITs should be considered as part of your equity allocation, as we have found out in the last six years.

Maybe I do have a strong view then. However, as I have previously mentioned, there is a time and place for everything and we benefited from holding UK CP between the early days of our firm in 2003 and when we became nervous over illiquidity and valuation in early 2007. Then in mid-2009, encouraged by contacts in the inter-dealer property markets (who told us that German insurance companies and Australian pension funds were clamouring to get their hands of UK prime real estate) we exploited a distressed opportunity. This value had unwound within eighteen months and we sold in the early months of 2011. Since then most UK CP assets have gone the way of the UK economy; listless and lumbering, before staging an unconvincing recent recovery. There is a fair chance that this recovery will continue, as long as our forecast of the UK’s re-emergence from stagnation is correct. However, with plenty of slack remaining in the economy, no obvious medium term inflation pressures, better yield opportunities elsewhere, no evidence of a wide supply/ demand imbalance and structural concerns over fees and liquidity, it is unlikely we will change our view in the immediate future.

“I sold my soul for the second time, ’cause the man don’t pay me,

I begged my landlord for some more time, he said “son, the bills are waiting”.

My best friend called me the other night, he said “Man, are you crazy?”
My girlfriend told me to get a life, she said “Boy, are you lazy”.”

 

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