Continuing our countdown to Christmas, Stephen Allen discusses navigating a tricky year for commercial property and picking suitable investments for the coming year
The property sector has experienced some tough times recently. Although redemptions in property funds started earlier in the year, with investors cashing in on strong returns, the Brexit vote magnified this trend, increasing outflows from the UK property sector.
When sentiment about property funds soured following the vote for Brexit, having one of the largest multi-manager teams in the UK and direct access to fund managers helped us make the right choices. Of course we are not saying this is fool-proof, but it certainly helps.
Property funds were even reported on in the mainstream press, as large outflows led to the suspension of trading by one large open-ended property fund run by Standard Life, with many other property funds then following that lead.
So is it all over? Things have settled down quite quickly since the post-Brexit panic, but what this episode clearly highlighted is the illiquidity of the underlying property holdings.
How did we fare?
At Architas we noticed sentiment was turning at the beginning of 2016 and this was not all down to the threat of Brexit - the Chinese share crisis, falling commodity prices and investors looking to cash in on the strong returns of recent years all led to redemptions in UK property.
Our research-led approach helped us to anticipate a slowing of the UK commercial property sector. In response, we started to diversify away from traditional ‘bricks and mortar' funds in 2015 and to add to positions in specialist property funds in areas such as student accommodation, retail warehousing and healthcare. These are much less correlated to capital market sentiment and could offer stable long-term cashflows.
So what's the outcome?
At Architas, we believe holding an element of property is vital when trying to build a balanced portfolio due to its lower correlation to bonds and equities. Additionally we aim to diversify across different types of property to spread risk where possible.
We felt that negative pricing adjustments, introduced by numerous property funds to better reflect underlying valuations, were somewhat overdone and that the impact of Brexit on UK property would be less severe than pricing suggested.
We used the opportunity to top up positions in L&G UK Property and the Kames Property Income Fund on weakness. Both funds remained open through the drama. Most suspended funds have now reopened, while those that had applied pricing adjustments have removed them and are trading at slightly lower levels than pre Brexit.
How does this affect us?
Architas has a neutral position on property as a whole, maintaining our bias toward specialist property and real assets such as infrastructure that have revenue streams linked to government-backed schemes, for example, as we believe they will be sound defensive investments in a stressed macroeconomic scenario.
When investing in UK commercial property we endeavour to select the funds that we feel will be least affected if another shock comes. We cannot promise we will always have the right answer but what we can promise is the best efforts of 22 investment professionals with research at the top of their agenda.
Stephen Allen is senior investment manager at Architas Multi-Manager.
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This is for financial adviser use only, and should not be issued to or relied upon by retail clients. AXA is a worldwide leader in financial protection and wealth management. In the UK, one of the AXA companies is Architas Multi-Manager Limited, an investment company that provides access to other investment managers' services through a range of multi-manager solutions, including regulated collective investment schemes. Architas Multi-Manager Limited is a company limited by shares and authorised and regulated by the Financial Conduct Authority. It is registered in England: No. 06458717. Registered Office: 5 Old Broad Street, London, EC2N 1AD. Architas, 5 Old Broad Street, London EC2N 1AD. Telephone 0207 562 4900, telephone calls may be recorded.
