Construction cranes stand around skyscrapers in the City of London, including 20 Fenchurch Street, commonly called the ‘Walkie-Talkie’ building, as they are pictured from Waterloo Bridge in London, on August 17, 2017. (TOLGA AKMEN/AFP/Getty Images)
Opportunities to generate income on investments are vanishingly rare, which is why the recent Brexit-related-wobbles in the U.K. commercial property sector have been worrying for investors. Diversification of income is tough enough, without being forces to abandon an entire sector. However, there are signs that asset allocators are dipping a toe back in this unloved area.
John Redwood, chief global strategist for Charles Stanley, wrote in the Financial Times that anti-Brexit sentiment had weighed excessively on the sector and fears of declining rents and weakening property values had been overblown. He said: At the very time U.K. listed Reits are cautious and their property valuers are fearful, overseas buyers are piling into London like there is no tomorrow. City skyscrapers have sold for sky-high amounts. In March a Chinese property developer paid £1.15 billion for the Cheesegrater a yield of just 3.45%. This price was 26% more than its recent September valuation.
It is not the only landmark building to be snapped up by foreign investors, encouraged by the significant decline in sterling – the Walkie-Talkie was sold to a Hong Kong investor for £1.3bn. The deal for the Nine Elms development in Vauxhall has been revived with new Chinese buyers.
Redwood has been a prominent Eurosceptic and, as such, is more naturally optimistic about a post-Brexit future than many, but he is not alone in supporting commercial property. Whitechurch Securities investment director Gavin Haynes has been adding to the asset class having exited last summer due to concerns over valuations. He says: On the effect of the Brexit vote and the effect of investment flows on liquidity, we are now more sanguine. The yields offered by the asset class appear attractive relative to bonds, while the U.K. economy has not fallen off a cliff and overseas buyers continue to support demand. As a result we have added a modest weighting to cautious and balanced mandates.
This recent move back into property is endemic of our view that with cash continuing to provide a negative real return, there are opportunities across asset classes that can provide more attractive long-term growth prospects and more attractive yields.
Certainly, valuations have come down. For many property investment trusts there is a marked difference between their recent NAV performance (i.e the value of the properties they hold) and their share price performance. The Standard Life Investments Property Income trust, for example, is up 44.2% in NAV terms, and just 36.5% in share prices terms over three years. F&C Commercial Property is up 38.9% in NAV terms, and 34.2% in share price terms over the same period.
The yields are undeniably attractive. The highest yielding investment trust the AEW UK REIT has an historic yield of 7.8%. Even the lowest fund in the sector the Schroder Real Estate Investment trust has a yield of 3.3%. If investors are worried about capital values, the income provides a nice cushion.