Seven years after the deepest recession in living memory investors in property funds are still showing a growing appetite for property. In a technical term used when investing in funds, they are paying a premium to net asset value (NAV) – in other words when they invest now, in most open ended funds* investors are happy to pay over the odds for the assets in the funds.
Alan Brierley, a director on the investment companies team at Canaccord Genuity, told the Financial Times (FT):
“This is the most expensive this collection of companies has been.”
The market capitalisation of those trusts invested directly in property, as opposed to those trusts that just buy shares in property companies and other trusts, has increased from less than £2bn to around £9bn over the last 10 years. This wall of money growing in property funds is a reflection of property as a safe investment resulting in more property funds available to invest in and the premium to net asset value they are currently trading at.
The graph shows the average premium or discount of the share price to net asset value on global listed direct property funds, which is a good indication of investor appetite for the property sector.
In 2005 the share premium stood at just under 10 per cent before dramatically falling with the financial “crash” to around 50 per cent discount to NAV (the time to invest if you had the nerve) before recovering and reaching a record high of nearly 19 per cent in May 2015.
Investors are searching for income (yield from investments) so with interest rates at near zero and bond rates hardly any better, returns from property trusts are a no brainer when it comes to a place to park your cash.
Property investment trusts, which invest mostly in commercial property, generate their income from the rents paid by the occupiers the buildings bought, and given the wide spread of risk over many property investments the trust funds often leverage their returns – gearing up by borrowing money to enhance their return on capital.
With property returns averaging around 18 per cent in 2014 it may still be profitable to invest in selected funds: Andrew Summers, head of fund research at Investec Wealth and Investment told the Financial Times:
“You can justify a high premium through the income streams,” he says. Mr Summers suggests calculating what a fund’s dividend yield might be if its premium gradually reduced to zero over the period for which you plan to invest; some funds still offer competitive yields in this context.
But Shakhista Mukhamedova, analyst at Brewin Dolphin, cautions that the Standard Life Investments’ Property Income Trust, a strong performer but she would think twice before investing at the current 15 per cent premium.
As to the future, property markets go through cycles and inevitably they will fall again, but wealth managers are still very positive on the sector and see no imminent falls.
Ms Mukhamedova told the FT:
“We are still positive. We expect to see rental growth coming through — we think there is still more to gain by remaining invested in the property sector”.
Other funds are hedging their bets by buying into less cyclical sectors such as student accommodation, doctors’ surgeries and there are moves in train to invest in residential developments, helped by government guarantees through the build to rent scheme.
The uplift has been helped by American property investors with a strong dollar against the euro, snapping up real estate bargains. The dollar started its meteoric rise against all major currencies in June last year and still has a way to go according to Forex experts.
American purchasing power in Europe’s real estate markets is sustaining prices and has proved irresistible to US investors seeking to profit from capital growth and currency opportunities.
Jason Kumpf, real estate specialist at USForex has said:
“The US dollar is still strong and the economy is good and the rest of the world is a little softer. It’s a great time to increase your pieces on the international Monopoly board”.
Bruce Dear, head of London real estate at Eversheds, commenting on British Land Company’s positive results, has said:
“UK real estate markets are being powered by multiple macro-economic free gifts; it’s like a beneficent baby shower: low bond yields, low interest rates, vast global cash reserves in search of a stable home and QE-pumped asset prices.
“It’s a sweet time, but after the baby shower comes the hard parental work. Investors need to be sure they have strong tenants in well-located buildings. Only those assets will hold their value when the presents stop and the sleepless nights begin.”
*An open ended fund is a publicly traded mutual fund which issues and trades in its own shares with an unlimited number in issue as demand determines. This is opposed to a closed end fund which raises a fixed amount of capital and issues and trades in a fixed number of shares.
Property Funds Hit Record Valuations – http://t.co/Qw4aoJzMUK
— LandlordZONE® (@LandlordZONE) May 19, 2015