Yield, scope for capital growth and diversification benefits have made property a ‘no brainer’ component of many balanced portfolios. Structural and regulatory factors, however, have combined so that the rationale for property is being re-examined by some. Do its attractions remain intact?
And if they do, does regulatory uncertainty undermine its role in a portfolio? In our view, the answers are ‘yes’ and ‘no’. All that’s required is a bit of re-thinking away from the traditional property model.
Traditional portfolios – causes for concern
Several structural real estate trends are at play – some pose a challenge whilst others offer opportunity. The pandemic has accelerated key themes – the transition to online retail and a re-examination of the sort of office space that makes sense for the ‘hybrid’ working model. Many ‘traditional’ portfolios find themselves on the wrong side of these trends.
Liquidity has compounded the challenge for ‘traditional’ property portfolios and the FCA’s ongoing review creates uncertainty around advance notice for redemptions and new fund structures. Combine this with structural shifts in the opportunity set and it’s easy to see why some feel that property has lost its lustre.
Time to rethink – real estate securities unlock ‘alternative’ property
Avoiding the high street and old office space sounds simple enough but legacy real assets can be a challenge to exit especially where structural trends serve to exacerbate liquidity constraints. Liquidity becomes a minor issue when investing in property via listed real estate and through a universe like the FTSE EPRA/ NAREIT Developed Europe Index, it is possible to tap into a fast-evolving and geographically diverse opportunity set rich in ‘alternative’ property sub-sectors.
Retail – selective thinking
Take the evolution of retail. UK high streets are under pressure but there’s real growth in well-located retail parks and premium discount outlets – convenience and ‘click & collect’ shopping are in vogue. And as we buy more online there’s a boom for last mile delivery and urban warehousing property assets. Logistics has been an obvious and big beneficiary and although we’ve seen yield compression there remain opportunities in land rich quality businesses both in the UK and Europe looking well placed for ongoing development in this space.
It’s also important to consider how opportunities vary by location. The UK is further along the online retail road than continental Europe. From an investment perspective, you may want to avoid UK shopping centres, but affordable rents and higher footfall mean their European counterparts remain selectively attractive.
Perspectives on healthcare
Elsewhere, sectors like healthcare, social housing, self-storage, and student accommodation look interesting. The former is a diverse sector, so it pays to be selective. Just now for example, we place an emphasis on premises utilized by primary healthcare providers like the NHS. Nursing homes, meanwhile, look challenged by relatively thin margins so we’re happy to avoid this area of healthcare for now. Of course, we’re not the only ones with a positive take on these areas so we use market volatility to build positions when the price is right.
Keep property in the mix
We are long-term proponents of the merits of accessing property via listed real estate, either solely or in combination with select physical assets as we do in our Property Growth & Income Fund. Our direct exposure is orientated around relatively small lot sizes with an emphasis on industrials and logistics. Within the real estate securities allocation, we invest in a diversified range of high-quality property businesses in the UK and across Europe. It’s an approach that allows us to sidestep the challenges facing more traditionally structured portfolios and harness opportunities that lie beyond their reach.