Specialists over generalists
Most wealth managers agree that Reits will enjoy an incremental and long-term increase in support rather than a mass transfer. They are more likely to recommend specialists in thriving sub-sectors such as ‘last mile’ logistics, and few picked out trusts with broad exposure.
Oliver Creasey (above), head of property fund research at Quilter Cheviot, said the timing of changes made by the FCA would be important. He said waiting periods of 90 days or more for withdrawals could prove ‘problematic’. If implemented with a delay, as is likely, he suggested the sector could be ‘peppered with outflows’ in the run-up.
Creasey added that a number of clients remain sceptical about shifting into Reits. ‘They have reasons for not wanting that exposure. Probably, they’re nervous about a swinging price to NAV,’ he said.
Mick Gilligan, head of managed portfolio services at Killik & Co, highlighted that a lot of money has already exited the giant funds in recent years. More than £2bn left the UK Direct Property sector in 2019, according to the Investment Association (IA).
In his experience, Reits’ leverage puts some off switching, despite the long-term benefits of enhancing the yield and gearing the capital return. ‘When things go wrong for the property sector, typically every 10-20 years, it is the most leveraged entities that fare the worst,’ he said.
Creasey said Quilter remains underweight property, as it expects a vaccine-fuelled recovery to lift other sectors to a greater degree. Nevertheless, he still rates the L&G UK Property fund, the country’s largest, as a ‘buy’ for investors who want to stick with open-ended exposure. Although reluctant to make direct comparisons, he likes £10.9bn warehouse group Segro (SGRO), whose shares have nearly doubled over three years before dividends.
While Creasey does not expect a boom in industrials in 2021, he thinks trusts with the most attractive office exposure, such as Derwent London (DLN), could surprise positively as workers head back in for three days a week.
Gilligan said Killik’s allocation to property trusts continued to creep up, with yields remaining favourable compared to bonds. Londonmetric (LMP) is one of its top picks for logistics exposure.
Killik is also backing a strong recovery in student accommodation provider Unite (UTG). The £4bn Reit, which is the UK’s largest private provider of student accommodation, is also on Quilter’s buy list.
No stampede yet
Though there has been a clear hit, the latest Investment Association data on open-ended funds does not provide evidence of a mass rejection of bricks-and-mortar just yet. In net retail sales, £543m flowed out of the UK Direct Property sector between September 2020 – when the first funds reopened – and the end of January.
Since reopening in October, the L&G Property fund had outflows of just over £680m to the end of February, according to Morningstar, shrinking to just over £2.3bn in assets.
A handful of funds, such as the M&G Property Portfolio – which was heavily exposed to UK retail property and suspended trading ahead of the pandemic in December 2019, essentially precipitating the sector’s latest crisis – remain gated, meaning outflows are all but assured when they reopen. M&G Property is set to reopen by the end of June.
There are signs, however, that some of that money could move into other funds. Net retail outflows from all property funds, including the Property Other sector, were £400m from September to December. But that was reversed in January, with £117m of inflows driven by more globally focused strategies investing in listed property.
Beneficiaries include funds such as Schroder Global Cities Real Estate, which Brewin Dolphin picked out for its holdings in attractive niches. Shakhista Mukhamedova, fund analyst at the wealth manager, said their property exposure remained ‘very selective’, favouring sectors such as warehouses. Preferred closed-ended options include Aberdeen Standard European Logistics Income (ASLI) fund and £3.2bn UK giant Tritax Big Box (BBOX).
Ben Seager-Scott, Tilney’s head of multi-asset funds, agreed the FCA’s proposed changes would discourage many investors and that some of that money would flow into Reits, which he thinks are more suitable for retail investors.
Across its range, Tilney has some exposure to bricks-and-mortar property funds rather than trusts, but Seager-Scott said these were long-term positions and they have never felt ‘trapped’.
Credit: Source link
