Investors can reap rewards from Britannic Asset Management's UK Property Fund - it not only gives them access to commercial property but offers monthly income distribution too
Britannic Asset Management's UK Property Fund is one of a new breed of authorised property unit trusts investing 100% in commercial property. And, almost uniquely in the market at the moment, it offers investors monthly income distributions too.
For many people a property investment may mean buying a second home and renting it out. However, there is another type of property you can invest in, and do so more modestly through a unit trust structure - commercial property. Recent changes to regulations have opened up this asset class to the ordinary investor and allowed unit trusts to invest up to 100% in commercial property for the first time.
Rule change
Before now it was only possible to have up to 80% commercial property in an authorised property unit trust and indeed most, or possibly all, of the funds created under the old rules have significantly less in commercial property than even that 80%. Britannic Asset Management has taken advantage of this rule change and created a fund which invests fully in commercial property.
property appeal
Commercial property shows little correlation to the performance of equities and bonds making it a highly effective diversifier in a balanced portfolio. The bursting of the dot.com bubble in 2000 has changed people's perceptions of risk. Since then there has been a realisation that diversification and balanced portfolios are a good idea. The combination of consistently strong total returns and impressive capital growth is beginning to seduce investors into this asset class. The benefits of investing in commercial property can be characterised by a secure stable income stream coupled with the potential for long term capital growth.
Commercial property historically has also shown lower volatility which means values tend not to fluctuate as frequently or to the same degree as say equities or bonds. Commercial property also follows a different cycle from other asset classes. It has consistently generated positive annualised total returns over the past 10 years which have generally outperformed those of equities and bonds.*
fully invested fund
Britannic Asset Management's UK Property Fund offers a relatively high and stable income stream together with some capital growth. To achieve this, the fund, unlike a number of similar funds currently available in the market right now, is strategically managed on a fully invested basis with minimal cash exposure using a well developed investment process. First it develops a market view by using inputs such as consensus economic forecasts, market indicators and some key property indicators the company has developed itself over time. It then uses this view as a framework to guide subsequent stock selection. The fund has 120 tenants spread over 38 properties and these properties form a balanced portfolio invested mainly across the three principal sectors: retail; industrial and office with investments spread throughout the UK.
strength and control
The overall covenant strength across the properties within the fund is strong, with a large proportion of the income being derived from high quality tenants such as the government and major companies - many of them household names. The fund also benefits from a range of risk controls, set in place to achieve adequate diversification. The main risk control is a sector mismatch of +/- 15% for the individual sectors and a size control where the fund does not hold properties that are more than 10% of the overall fund - with the exceptions to this being shopping centres for example which are internally diversified through the range of tenants which occupy them. A limit on the number of properties the fund holds is also in place. This is set at between 30 and 80.
encouraging start
The UK Property Fund was launched in December 2004, so it's early days so far as any performance track record is concerned. But, it has had an encouraging start and, with only two months of confirmed performance data, the fund has outperformed its proxy benchmark over this period. The Britannic property team has an excellent track record overall and, for example, all their property funds outperformed in 2004. *
strategically positioned
The fund is, relative to its benchmark, underweight retail and overweight industrial properties. The retail sector has outperformed the other two sectors strongly over the last three years, and Britannic's strategic view is that they are more cautious about its prospects going forward. They expect there to be a much greater degree of convergence in sector returns during 2005, and don't believe mismatch between the three main sectors in going to be a major issue.
Britannic is relatively optimistic about the outlook for the commercial property sector as a whole, treating suggestions that there has been an emergence of a property 'bubble' with scepticism. They believe that for too long property yields looked cheap, and while equities were growing in value, property was never going to be re-rated because the investment demand was not there. Where we sit today is probably closer to fair value.
Market outlook
Looking forward into 2005, Britannic believes returns will be around 11%. Given an income yield of 6%, that only requires around 5% capital growth, which if you compare it with 2004 when the property market delivered 12% or 13% capital growth, is comparatively modest.* They see that growth coming from a further slight inward correction of yields; the balance of supply and demand in the investment market at the moment suggests that can and will continue, to a lesser degree than last year but nevertheless continue. And on the occupational side, in terms of rental growth, they feel it will probably strengthen slightly this year, but probably still be relatively tame at around 2% or 3%.
Combine this with 6% income yield plus a bit of inward yield correction and a small bit of rental growth, and they think commercial property can readily produce 11% total return this year. They are firmly of the view that the fundamentals are in place to allow commercial property to deliver sustainable results over the next three to five years.
*Source: IPD Monthly Index at 28/02/05.
disclaimer
Past performance is not a guide to the future. The value of investments and any income from them can fall as well as rise and is not guaranteed. Exchange rate movements may cause the value of overseas investments to fluctuate.
Property investments are relatively illiquid compared to bonds and equities and can take a significant length of time to trade. This is reflected in the redemption terms. The value of property is determined by independent experts and is based on opinion rather than fact. Its value and any income from it can fall as well as rise and is not guaranteed.
