The BMO UK Property fund is set to reopen on 14 December as its managers have revealed their big call on industrial property.
It comes after rivals, including L&G, Columbia Threadneedle and St James’s Place, unfroze their funds earlier this month on the back of new guidance on valuations.
While the fund has had challenges over the last year, like many of its peers, it posted a 1.21% return in the year to the end of October, compared to the sector’s -4.15% return. Manager Guy Glover is positive the changes made during the nine months it remained shut position it for the future.
The £479m fund has sold assets in office, retail and retail warehousing, increasing the fund’s cash position to 25.7%. This also means that the fund now has a 55.3% weighting to industrial property.
‘It’s really the fundamentals of the logistics sector whereby you’re getting occupancy take-up, driving rental growth, which is the attraction, so it’s not just about being more resilient.
‘With the structural changes in that wider market we’ve seen consistent rental growth over a number of years […] and we certainly see that continuing. Our forecast indicates tremendous outperformance from the industrial market compared to the retail market,’ he said.
‘We’re making a big call on that market because of those fundamental reasons and it should give our investors a more resilient, longer-term return with some great potential associated with it.’
The popularity of industrial property
But BMO is not the only one looking to benefit from the rising demand for industrial property assets. Others have noticed the resiliency of the sector and have been swooping on assets in both the UK and abroad.
Private equity giant Blackstone, for example, acquired a UK logistics portfolio from Prologis for £473m earlier this year. Elsewhere, Oxford Properties Group bought a 15-acre site in Heathrow, London.
Assistant fund manager Emma Gullifer admits that because of the occupational fundamentals, there is a lot of demand and normally the team wouldn’t go after areas chased by such ‘hot money’, but she explains why this time is different.
‘There is real focus and further yield compression in those assets because of that sustainable rental income coming through. You see the income growth coming through in each of the next five years, then already those yields start to look more attractive. We’re getting rental growth and potential for capital growth in that sector,’ she said.
In terms of asset sales, Glover and Gullifer have sold out of holdings where they highlighted long-term concerns. While sales in retail warehousing has reduced the fund’s overall retail exposure, some regional offices were also on the chopping block, mainly due to changing working practices.
In addition, the fund reduced its investments in car showrooms. Although these can still provide income in the short term, Glover said he was concerned about the changing nature of the market in the longer term.
While Glover added that they were not able to achieve pre-pandemic pricing levels for every asset they sold, the valuations were higher than where they were three months ago.
‘From the start of the fund what we wanted to do is always buy core good quality buildings. The reason for that is not just because you get income resilience but also because other people want to buy them whatever the state of the market. We got really good values for the assets we’ve sold, on average they’re above the valuation we had three months ago,’ he explained.
Positive stories
The fund has had some positive stories over the year as well, completing 12 asset management deals, including re-gears, lettings and rent reviews. An industrial building in Dartfort is one example.
Glover said the tenant was running into difficulty but the fund had a long-term guarantee from a global corporation, and when they decided to take the lease back, the corporation paid a six figure surrender premium.
While the fund was refurbishing the unit – including improving its environmental rating – they also managed to sign a 20-year lease with an urban logistics freight company, with the rent 44% higher than what was previously being paid – all while on lockdown.
Another existing vacancy was in Coventry, and the team managed to agree new terms and re-let that unit as well. Following those two deals, the fund’s vacancy rates have come down to 2.7%.
But Glover pointed out it has not been easy and the fund has also had to support some businesses, such as two charity shops in Dorchester, or Tui Travel, with which they agreed a rent concession, to be paid back next year.
They could not support everyone, however. Which was the case when Travelodge proposed a company voluntary agreement to impose short-term rent reduction. The fund had a property occupied by the budget hotel chain in Bury St Edmonds and instead opted to exercise a break clause in the agreement and let it to another brand.
The troubles with Travelodge’s CVA proposal was widely publicised with dozens of landlords ditching the group to sign leases with Goodnight.
‘Where we do take action, it is where we feel a better outcome can be achieved for our investors,’ Glover said. ‘Actually getting 30 years’ RPI income is a great outcome for the fund and for the investors. Where we’ve hit challenges we’ve tackled them and delivered a solution to our investors.’
Now that the fund is armed with extra cash, the managers will be seeking to take advantage of market opportunities, Glover added.
While opportunities in the industrials sector is at the forefront of their minds, Gullifer said there are also select assets in other areas the managers are eyeing.
‘In offices perhaps we’ll be more selective, we do see some downside risk there. Until we can really assess the full impact of the pandemic we might be a bit more cautious about investing into that sector again. With retail and retail warehousing there are select opportunities in that sector. Supermarkets for example. We hold two in the portfolio already which have done really well,’ she said.
The fund still holds one hotel but Gullifer pointed out that the sector will take some time to recover, even though the types of lease structures, the core stable income and the RPI linkage make it a potentially interesting area.
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