| |
| |
Investment
Quarterly - Q2 08:
Not so safe? |
|
|
| |
| David
Adams asks if property is still a viable investment choice
for charities, whether directly or through funds, despite
the rather gloomy picture painted by the national media |
| |
Alas,
alack, what has happened to our beloved property market? For
the best part of a decade the old phrase ‘safe as houses’
seemed entirely apt – seemingly sensible people resigned
from perfectly good jobs to try and make big money as property
developers and speculators, and property investment fund managers
and real estate salespeople throughout the land rose from
their beds each morning to greet each new day with songs of
joy.
But now the tide has finally turned, and not a day goes by
without more headlines predicting doom for anyone with a stake
in the property business. On the day this article was written,
George Soros was telling the media that the UK stands to suffer
at least as much as the US during the credit crunch, precisely
because inflated property prices have been the driving force
of our economy for so long.
Yet it is still perfectly possible to argue that none of this
is a disaster for charities with property investments, whether
directly owned, or through investment funds. “If you
look back on why charities invest in property, the original
rationale still stands,” claims Charles Mesquita, charity
specialist at Rensburg Sheppards.
Clearly, he is no impartial judge, and in January his own
company authorised the sale of ten per cent of the assets
held by its own Charities Property Fund CIF (Common Investment
Fund) because of fears over falling property values.
But the fact is, investing in property in general, and in
certain classes of commercial property in particular, is still
almost certainly a good idea in the long term.
Healthy yields are based in large part on stable rental income,
with the institutional lease structure, which means rents
can usually only be reviewed upwards, safeguarding those returns.
At the same time, in addition to providing strong returns,
investing in commercial property is also a useful way of diversifying
charities’ portfolios, which still tend to consist for
the most part of equities and bonds; and hedging against inflation.
True, property is not as liquid as other assets, but most
charities are much less likely than other types of organisations
to need to raise a huge amount of money at short notice.
That is not to deny that things have gone pretty badly in
recent months. The industry standard IPD (Investment Property
Databank) index shows that capital property values have fallen
by more than 15 per cent since last summer.
“We’ve gone through quite a sharp correction,”
says Guy Morrell, head of real estate multimanager at HSBC
Investments. “While some of the overpricing has diminished,
in the short term we see continued weakness to the unlisted
market. We’re concerned about over-supply in some areas,
and the City in particular. So we don’t see, at the
moment, great value in the UK unlisted commercial property
market. We are waiting for the right time to go into the market,
but we don’t think that time is here yet.”
But he also cites data from the Investment Management Association
which shows that the rate at which money has been flowing
out of commercial property funds has slowed and some funds
are now reporting net inflows, following big outflows at the
end of 2007: “That does suggest some investors believe
that the worst is over, so our view may be seen as being more
cautious than some.”
His pessimism about the office sector is not universal either:
Mesquita argues that one of the very few positive results
of the credit crunch is that it has stopped some speculative
developments, thus helping to ease over-supply problems.
But in general, fund managers have backed away from property.
“In terms of near term market outlook, we continue to
be pretty cautious, as there is still a great deal of leverage
of borrowing in the commercial property market yet to be refinanced,”
says Richard Robinson, head of charities at Schroders.
But, as he points out, charities with endowments seem not
to have been as spooked as were other investors: “Most
endowments are by their very nature avowedly long-term investors,
and in the main are looking to ride out this period of turbulence,
believing the asset class outlook to be intact in the long
term.”
Top
And although things are bad in the property sector, they are
worse elsewhere. Roger Curtis, head of charities at Aberdeen
Asset Management, points out that property did not suffer
so badly as many equity-based funds in the first quarter of
2008. He doesn’t see property getting back to delivering
the sorts of returns investors got used to in recent years
for a while yet, but sees no reason not to invest in property
for the longer term.
“In the near term I think it is likely that we will
have less strong returns,” he says. “If you look
at the strong returns that came out of property over the last
five years, much of it has been driven by capital growth and
yield compression. We think that the returns over the next
three years are going to be much more a reflection of the
yield. So you’ll have prices down but yields up. Some
investments are yielding six or seven per cent [per annum],
so quite attractive levels.
“If you look over the next few months, some of that
will be offset by some capital losses, so that will reduce
those yields to maybe 2.5 to three per cent, but over the
next five years we think that those yield-driven returns on
average will be quite attractive compared to other asset classes.”
In addition to those charities exposed to the property markets
through indirect investment, many also have a direct exposure
in the form of property the organisation owns, whether as
owner occupiers or as landlords of buildings used in part
by the organisation or acquired as investments or via bequests.
As always, many charities will have to take a decision this
year over whether or not to buy properties. But should they
do so?
Louise Davey, relationship development manager at the third
sector financial specialist Triodos Bank, which provides mortgage
finance to charities, doesn’t see why not, providing
the purchase decision is made for the right reasons. She also
says she hasn’t seen any evidence of charities facing
any new problems raising mortgage finance as a result of the
credit crunch.
Indeed, she adds, this might even be a very good time to buy
property. “Clearly it is a buyer’s market, so
for the right charity that’s an opportunity,”
she says, noting that as rental values continue to be stable,
there are particularly good opportunities for charities buying
a building and letting space within it.
Nigel Price, business development manager at another charity
finance specialist, Unity Trust Bank, believes there’s
no reason charities shouldn’t invest directly in property,
if the deal and the strategy behind it are both sound.
“Valuations are the key to investment strategy,”
he says. “If they’re buying at the right sort
of price then the value is a long-term issue. If you look
at the residential market, where [AHS] are buying, the falling
market is a good time to be buying. I don’t see the
credit crunch, or the apparent pressure on property values,
having a significant impact on charities. If they’re
buying assets for operational reasons then the proposition
will still stack up.”
But charities that own investment properties do now face a
new problem as a consequence of changes made last year to
rating regulations, which mean that empty commercial properties
are no longer exempt from paying local authority rates.
“This is an additional, unwelcome burden, and we suspect
has yet to be fully factored into some prices,” says
Schroders’ Robinson. “We don’t think people
have fully factored that in as something that will further
depress yields.”
It will also affect property investment funds, yet fund managers
can point to it as another good reason for charities to invest
in a property fund rather than shoulder the risk and financial
burden, and the task of untangling sometimes painfully complex
tax regulations associated with property investment, on their
own.
“The question is, have they got the expertise on their
board to manage it, or are they better off selecting a fund
manager?” asks Rensburg Sheppards’ Mesquita.
He champions the Common Investment Fund approach, noting how
well they have performed in comparison to Real Estate Investment
Trusts (REITs), quoted companies that own or operate property,
and distribute a defined portion of their income to shareholders
(in the case of the UK this is set at 90 per cent) in return
for exemption from corporation tax on the trading of their
property portfolios.
“Looking at the performance of REITs in 2007 [the first
year in which UK charities could invest in them], they have
performed considerably worse than open-ended property vehicles
like CIFs, because they are subject to sentiment,” says
Mesquita, noting that, in this case at least, the additional
liquidity gained by investing in a REIT instead of a property
CIF comes at a price.
At the same time it’s also worth remembering that any
individual investor seeking what the financial experts would
call a genuinely diversified portfolio needs to have £50
million and upwards to invest in the first place (and some
would say £100 million). Clearly few charities are in
this position without joining forces with other organisations
in a CIF or similar collective vehicle.
Of course, not many of these funds are able to point to high
levels of take-up among charities at the moment, particularly
not from those charities that have not invested heavily in
property up to this point, but the fund managers seem confident
that this won’t be the case for long.
“At the moment my impression is that charities that
have not had much exposure to property – given the type
of media comment that we are seeing, the concerns about the
outlook for the UK economy that we’re seeing in the
headlines every day – they’re not immediately
looking to put investment into property,” admits Aberdeen
Asset Management’s Curtis. “But in many ways,
when you have had a period of disappointing returns then you
can take a long-term view and look at getting in, [to build]
a more diversified portfolio.
“I think a move into property is a sensible one, because
risk and return characteristics are very good,” he concludes.
“But property is an asset class that has to be viewed
over the long term.”
Top
To return to the June 08 features list click here
|
| |
| |
| |
|
|
