Yields have rocketed on secondary assets in commercial property, presenting a compelling story for investors, according to Richard Tanner of AEW UK.
Banks have capitulated and are starting to offload properties from their balance sheets, presenting a chance for property funds - and their investors - to benefit from cut-price sales, the managing director said.
But this window of opportunity will have closed by the end of the year as managers of the larger property funds catch on.
He commented: “I have lost count of the number of investors I have heard saying they are looking for good secondary properties. This must have an impact on the market.”
While his general outlook is positive, Tanner warned “the elephant in the room” of rising bond yields could impact “bond replacement” properties such as supermarket outlets.
AEW, an affiliate of Natixis Global Asset Management, operates a value investment philosophy. In terms of commercial property, it is concerned primarily with capital value per square foot, depth of tenant demand and obsolescence.
Tanner showed how these themes affected stock selection in the AEW UK Core Property fund, which launched last year.
For example, he preferred Tangent House in Reading over 27 King’s Road, also in the town, even though it had a lower yield.
“It is next to the station and it is more modern so we wouldn’t need to develop it,” he said. “It is also shorter than everything around it, so we could sell it to a developer who could put more on the patch.”
Likewise Tanner managed to avoid the value trap of a 13-year old office block in Peterlee, County Durham. The rent was £26 per square foot and it offered a yield of 24%. But the take-up for office space in the region was “zero”, Tanner said.
Instead, he chose Northgate in Bristol’s Aztec West. This older building had a higher rent and a lower yield, but tenant demand was healthy.
AEW UK Core Property is open-ended but trades quarterly. This will move to monthly when it converts to a Property Authorised Investment Fund (PAIF).
Currently the distribution yield on the £41.3m fund is over 11%. However, Tanner said this would reduce as more properties were added to the portfolio, which is still in purchasing mode.
The fund will concentrate on those properties valued under £50m. Tanner said this helped diversification and lessened the impact on the portfolio of a big holding going under.
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