Andy hick's Edinburgh property portfolio has profited from the continued strength of the retail sector post 11 sept
Investing in commercial property is hardly exciting, but over recent years it may have been a wise move. Over the past three years, the Edinburgh Property Portfolio has returned 28.6% on an offer-to-bid basis, compared to the average UK All Companies portfolio, which lost 18.8% to 1 July 2002. Over one year the Edinburgh Property Portfolio gained 1.3%, while the average UK fund returned -19.3%, after charges, according to Standard & Poor's figures. The Edinburgh Property Portfolio is £100.5m in size. Around 75% of the portfolio is invested in direct commercial property, managed by Andy Hicks. The remaining 25% is invested in property-based equities, managed by Robin White. White and Hicks work for Capital & Counties, the property specialists, which manages the Edinburgh fund under contract and has done so since its launch in mid 1999.
Why is there a mixture of equities and direct property?
RW: Unit trust rules dictate, for liquidity purposes, that 20% of property funds are invested in equities. Our target is 25% equities and 75% direct property.
Our unit holders predominantly want exposure to direct property, but we will increase exposure to equity holdings when they are very cheap and we see opportunities.
At the moment we are getting strong cash inflows. What tends to happen is that I will invest those cash inflows if there are opportunities. And then we build up enough money for Andy to buy a property.
Do you look primarily for income or capital growth?
AH: We aim for a high income, as well as the opportunity for capital growth. But the former is the primary objective.
What is the average size of properties in the portfolio?
AH: The average property is £5m, but I am trying to increase this. The most expensive is £7.8m, a large office block in Redhill, Surrey.
What kind of property does the fund hold?
AH: We have a very tight focus, which is one factor that distinguishes us from our competitors. Geographically we focus on central London and the South East of England. We have a third of the portfolio in the South East, a third within the M25 and a third within Central London.
Within that we also focus on offices and retail. Currently 65% of the direct property portfolio is invested in offices and 35% in retail. I have two new acquisitions in the pipeline, which are both in the retail sector. If these go through, retail will represent around 45% of the fund.
Do you favour one of these sectors over another?
AH: When we launched, the office sector was looking strong, hence the higher exposure to this area. Meanwhile, retail had been through a process of de-rating. That is turning around now and I predict that retail will be the strongest performer in 2002. Offices are coming down from quite a strong high since 2000. This is primarily due to the cooling in the economy.
What makes a property attractive to you?
AH: A good location and it has to have a good quality specification and be flexible so it can meet the changing needs of business occupiers.
It is also fundamentally important at the moment that there is a good quality tenant ' somebody who can pay the rent. We do not buy development properties. We want income from day one. The development process takes too long to generate income returns and it is too risky for this fund.
Would a correction in residential property values have ramifications for the commercial property market?
AH: The residential property market has absolutely no correlation to the commercial market, therefore if there is a correction in residential property then commercial property will not be affected.
What are the risks with investing in property?
AH: Of course property can decline in value and it is possible from time to time not to have a tenant, but in general the sector is low risk.
The decision-making process is a lot slower for commercial property. We don't need to make snap decisions in relation to world events and so volatility is lower and returns more stable.
One of the main risks to income is tenant default. For example, a multi-tenanted property we own in Southwark, London, recently lost a tenant after running into financial difficulty. As a result we lost that income stream although other tenants in the building continue to pay. This highlights the difference between property against bonds and equities. If I held shares or bonds in that company I would have lost the investment, but with property I can replace the income stream and maintain the capital value. That tenant was paying a rent of £18 per square foot pa, I'm now looking to re-let it for £32.50 per square foot pa.
Would you sell property once you thought it appreciated significantly?
AH: Property is a long-term asset. We generally hold it for seven to 10 years unless there is a reason to sell it at an earlier date. For each acquisition we create a 10-year business plan. We review it quarterly and rewrite it annually. We look at all the drivers, see how it has performed in the past, how it will perform in the future, and constantly review that to ascertain the best time to sell.
What are characteristics of the share portfolio?
RW: The portfolio tends to be a mix of large and medium to small stocks. The portfolio of shares aims to provide liquidity, not tie up the money in stocks that I can't sell. So we generally do not invest in anything with a market capitalisation of less than £100m.
How many companies do you hold in this portfolio?
RW: We hold a concentrated portfolio of 15 companies, but the range generally varies from 15 and 20. There are more than 60 companies in the sector ' about six or seven big companies and then a long list of smaller stocks so we can filter out the best.
How do you find good property shares?
RW: It is not difficult to find good property shares. The performance track record of property companies tends to be a reasonably reliable guide for how they will do in the future.
However, property shares are more closely correlated with the underlying stock market than they are with actual property, so at times they will trade cheaply relative to their net asset value.
This paves the way for corporate activity. Once a property company's discount to net asset value becomes too wide, some- one will become interested and try to take it over. We have had three successful takeovers in the past six months.
Are you positive on property shares at the moment?
RW: I have been a bit nervous that things have gone too far too quickly and may be out of kilter with the rest of the market, so we have held a lot of cash.
FUND MANAGER: Andy Hicks
Andy Hicks joined Capital & Counties as a property manager. In 1999 he set up the property element of Portfolio Property Fund and is currently responsible for the investment management of the properties.