Property Investing - Engaged Investor

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Property Investing - Engaged Investor

PROPERTYCommercialbreakShopping centres, office blocks, warehouses,factories – many different types of building comeunder the heading of ‘commercial property’. Howcan pension funds benefit from investing in thesetypes of property – and is now a good time to buy?Maggie Williams investigatesAccording to the NationalAssociation of PensionFunds (NAPF) 2007Annual Survey, the number ofpension schemes investing inproperty rose from 50 per centin 2005 to 60 per cent in2007. No doubt some of thoseschemes were tempted at thetime by figures from theInvestment Property Databank(IPD), which provides indicesfor property investment aroundthe world. Its UK AnnualProperty Index showed returnson property of over 15 per centeach year between 2004 and2006. However, last year’sfigures told a different story withthe same index showing a moremiserable figure of -3.4 percent – thebiggestyear-on-year fall in the indexsince 1990 – and 2008’sheadline figures are unlikely tomake pretty reading either.However bleak those numbersappear on the surface, propertyshould be viewed as a long-termcommitment and as such it’sunhelpful to read too much intoeither the bigger than expectedreturns shown in 2005 or theplummets of last year. The biggerconsiderations are whether propertyis a good investment for your typeof scheme.WHAT TO BUY?There are several different ways ofgetting involved in property,depending on the type and size ofscheme you have, and what youwant to gain from it.Listed property funds Property isowned and managed by a companyand investors buy shares in thatcompany. Although this can beloosely grouped under the generalheading of ‘property’, listedproperty funds – or REITs (RealEstate Investment Trusts) as theyare known in the UK for privateinvestors – are generally viewed asa form of stocks and shares. So, ifyou’re looking to invest inproperty as a way ofbringing more varietyinto your portfolio,REITs might not befor you. However, forsmaller pensionschemes, listed fundsprovide a means ofgetting someinvolvement inproperty. Mark Bunneyof ING Real Estatecomments: “In terms ➔ENGAGED INVESTOR JULY/AUGUST 2008 31


PROPERTYCASE STUDY: REGENERATION PROGRAMMEThe West Midlands PensionFund (WMPF) is an earlyadopter of Morley FundManagement’s regenerationfund. The fund has takennon-listed property in adifferent direction byinvesting in regenerationprojects, both land andproperty, in so-called‘degraded environments’such as former industrialsites. These sites arerelatively worthless, but areclose to city centre areas ofhigher worth. One of theaims of the scheme is toLOTS OF LEVERAGEimprove those areas. Thefund therefore has an angleof social responsibility aswell as returns frompotential increases in thevalue of the buildings andland. For the WMPF, theregeneration fund forms partof the scheme’s 1.5 per centallocation to sociallyresponsible investment, partof a 25 per cent‘complementary’ allocationnext to 60 per cent equitiesand 15 per cent fixedincome.Figures correct at March 2008.It’s impossible to talk about property without discussingleveraging and its effect on this form of investing over the lasttwo or three years. Leveraging means using debt to buysomething – the most common example in everyday life is amortgage. If you have a 10 per cent deposit for a house and a90 per cent mortgage, then your house is said to be 90 percent leveraged. Some funds applied the same principles topurchasing commercial property – they used the money thatinvestors had put into the fund as the ‘deposit’ and thenleveraged that with extra borrowing to buy more property. And,in the same way that some householders have foundthemselves unable to pay back their leveraged 90 per cent asinterest rates have risen and property prices have fallen, thosefunds have seen very challenging times due to recent marketconditions. It’s therefore important to understand the amountof leveraging that a fund includes if you are investigatingproperty investment.KEY POINTS■ There are a number of different ways of investing inproperty, depending on the size of your scheme andwhether you are prepared to tie up your money for along period of time➔ of UK mandates, if you’veallocated less than £200m, you are“going to be better going down thelisted route.” Listed property fundsalso sometimes give you the abilityto take money out of the fund atshorter notice than with the nonlistedproperty funds discussedbelow.Non-listed property funds This is afund that buys and managesproperty on behalf of its investors.Investors put money into the fund,generally for a specified minimumperiod of time. The fund managerthen uses that money to buyproperty. Investors see returns fromthe increased value of the buildingsand also (depending on the fund),money made from letting theproperty. There can be considerablevariety within this heading –whether in terms of the location ofthe properties the fund buys, or inthe type of buildings. This can alsoencompass more specialist forms ofproperty investing, such as theregeneration fund discussed in ourcase study, above left.Direct purchasing/management ofproperty Some larger pensionschemes own their own portfolio ofbricks and mortar and manage itthemselves, but this is unusual. It’sgenerally as a result of historicalpurchases or because the companyhas given the pension schemesome of the buildings it owns inorder to boost its assets. It’s nowunusual to find schemespurchasing property for themselvesrather than through a fund.Fund of Property Funds Fundof Property Funds can offer astraightforward way for smallerIf you’re looking for aninvestment type thatyou can dip in and outof at short notice,then property probablyisn’t for you”schemes to get involved in somedirect property investing by givingschemes the option of more limitedexposure to a larger variety of funds.WHAT MAKES PROPERTYSPECIAL?“Most pension funds treat propertyas a long-term hold,” says NeilCable, head of European real estateat Fidelity. “That means upwards ofthree years – and possibly as longas 10 to 15 years.” That timeframeis one of the ways in whichproperty differs from holding stocksand shares or bonds in your fund’sportfolio. It’s termed an illiquidasset – meaning that you aregenerally not in a position to takemoney out as and when you like –so if you’re looking for aninvestment type that you can dip inand out of at short notice, thenproperty probably isn’t for you.Property is a good means ofdiversifying (see our Rough Guideon page 46 for more information ondiversification) because it lacks theup-and-down volatility of equitiesand typical returns generally standsomewhere between equities and■ Property is a good way of adding diversity to yourportfolio, particularly as it produces returns in a verydifferent way from stocks and shares or bonds■ It’s now possible to invest in property in many differentparts of the world. But beware – some countries arehigher risk than others, in terms of local laws andbusiness practices■ With falling prices in many markets, now may be a goodtime to consider property – but carefully check details likeleveraging and where the fund invests.32 JULY/AUGUST 2008 ENGAGED INVESTOR


PROPERTYbonds. It’s also viewed as ‘noncorrelated’,which means that theeconomic factors that affect thestock market don’t necessarilyaffect property as well – a companydoesn’t move offices every time itsshare price goes up or down, forexample.Mark Bunney, head of fundmanagement for ING Real EstateSelect, explains that property is agood place to head if you’re lookingfor solid returns, but not for reallyexceptional gains. “Putting asidethe last few months, if you look atthe last two to three years therehave been good returns fromproperty. But you shouldn’t belooking for high alpha from it,” hesays. “You might make high returnsin the short term from property, butthat’s more by chance than atypical pattern.” Althoughestimates vary, a return of 6 to 7per cent a year from property is arealistic expectation.WHERE IN THE WORLD?If you are investing in property,particularly through a non-listedfund, the question of where to buyis still significant. Cable of Fidelitysays that he’s seen some big shiftsin investing patterns over the lastdecade. “In the early days ofproperty as an asset class,investment was only in domesticmarkets, but in the last ten yearsthere’s been a massive movetowards international allocations.One one hand, that’s good as itbrings extra diversification, butinvestors have to be careful.”That caution comes from thewide range of economic factors thatsit around property investment.Awareness of local rules ontaxation, relationships betweentenants and landlords and risks tothe stability of the country wherethe property is located are every bitas important as whether propertyprices are on the rise in that area.“From France being considered riskyten years ago, we’re now seeinginvestment in Vietnam, Brazil andbeyond,” observes Cable. “andthere are a lot of advisors out therewho don’t know what they’re doingin terms of managing local risk.”Acknowledged property ‘hot-spots’of the last couple of years haveincluded selected parts of Asia andalso Australia. Central and EasternEurope also has some potential, butmany commentators believe thatmarkets such as Hungary arecurrently overpriced. “Property is alocal game,” says Sacha Lewin,head of European property atStenham. “It’s preferable tounderstand a couple of marketswell. We choose a handful ofregions that have a stable legal andbusiness environment for ourinvestments.”IS IT FOR YOU?So, is now a good time for pensionschemes to invest in property?Cable of Fidelity believes that it is.“It’s a fantastic time. The UK’sproperty price falls may move ittowards being a cheaper market, sowith long-term leases and someresearch on the right tenants, this isa good move. You can’t generalisefor Europe, but there are some goodoptions there too. I’m not saying‘put all of your money into propertynow’ but we’re beginning to see theend of the price corrections. Now isthe point for pension funds to thinkabout going to good quality propertymanagers and asking if this it thetime to do this.” ■EXPERT VIEWDIVERSIFY INTO REAL ESTATEAndrew Smith, Head of Fund Management atAberdeen Property Investors, explains whyproperty is a good diversifier for pension schemesPension funds view property verydifferently today from ten yearsago – it has become amainstream, rather than an‘alternative’, asset class.Property offers pension fundsgood long-term returns which arediversified from equities andbonds. And, while returns haverecently been volatile, propertystill has good long-termperformance prospects.No longer exclusiveProperty investment has becomemore transparent, performancecan be measured more easilyand there is moreprofessionalism in how propertyinvestments are managed.Commercial property has movedfrom being an ‘exclusivepreserve’ for the initiatedproperty investor, to exhibiting allthe important traits of a matureasset class which is available toall. This change is evident inhow performance is measured. Itis now possible to track theperformance of property in mostmajor markets through wellestablishedindices, such as theInvestment Property Databankmeasures for Europe.Importantly, these indices allowpension funds to measure thecontribution real estate canmake to their long-terminvestments. This also makes itpossible to show thediversification benefits propertybrings to overall portfolio risk.Diversification lowers portfolioriskProperty tends to have a lowcorrelation to both equities andbonds – it performs differently asit responds to different marketfactors. This means investorsshould consider property todiversify their equity and bondportfolio risk. And pension fundinvestors can look further thandomestic markets. Theperformance of an individualproperty asset is a function ofthe local economy, and buildingspecificfactors. As the physicalassets cannot be moved, it islikely that investing acrossdifferent markets will offer morediversification benefits than, say,stock markets, which arebecoming increasingly global.Pension funds can investdirectly in property, although thisrequires significant funds. Forsmaller investors a fund ofproperty funds offers investors anefficient, broad and welldiversifiedexposure to domesticor international propertymarkets. This also enablespension funds to benefit from aspecialist team dedicated toselecting and monitoring best inclass managers in differentmarkets and sectors. AberdeenProperty Investors is an expert inthis area. We are the secondlargest property manager in theUK, and in the top tenworldwide. We offer directproperty investment, and havepioneered the development offunds of property funds in theUK, continental Europe andAsia.Long-term opportunitiesDespite the current propertymarket turmoil, property remainsan attractive long-terminvestment opportunity. Pensionfunds’ appetite for propertyinvestment is growing, as theasset class has moved furtherinto the mainstream, and therationale for diversifying awayfrom an over-reliance ontraditional asset classes isstrong. Property investmentoffers these benefits, and iseasily accessible through a fundof-fundsroute. ■ENGAGED INVESTOR JULY/AUGUST 2008 33

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