Property funds still offer a good long term investment and should be part of portfolios, managers claim

Written by Ray Clancy

Tuesday, 09 February 2010 09:28

The unprecedented growth of property investment companies during the last quarter of 2009 is unsustainable but there is still considerable optimism that a lower level of growth will be maintained in the future, it is claimed.

Property investment companies have had a roller coaster ride over the past few years. However, since the really tough times during the downturn they have recently experienced a renaissance, according to the Association of Investment Companies.

The average property investment company is currently up an impressive 52% over one year in share price terms, boosted by a narrowing of the discount from an average discount of 42% for the property sector a year ago, to 2% at 31 December 2009. But the average property investment company is down 40% over 3 years.

But in the current climate when interest rates are still at record low levels, mangers believe that property still offers a diversified asset class which will continue to produce yields and should be considered as part of any portfolio with a long term view.

‘Whilst I think a positive trend is likely to continue, pricing movements are likely to be far more subdued in 2010, with stronger occupational demand needed to keep this pricing momentum. With all the uncertainties surrounding the UK economy generally, there are still risks to a straight line recovery, but whilst interest rates remain low, real estate will continue to look attractive, coming off a much rebased floor,’ said Michael Morris, manager, ING Real Estate Income.
In the current climate when interest rates are still at record low levels, mangers believe that property still offers a diversified asset class which will continue to produce yields and should be considered as part of any portfolio with a long term view.

The background where property prices became dramatically over inflated on the back of generous credit markets needs to be taken into account, according to Marcus Phayre-Mudge, manager of the TR Property Investment Trust.

‘The main attraction is the high level of income and at the prime end the distinct possibility of rental growth. Importantly, we expect this demand for income to persist. We believe investors will continue to focus on strong income streams well into the future,’ he explained.

‘We believe real estate is an attractive asset class as it is a long term real asset that offers relatively high levels of income return. Rental yields in excess of 7% in Europe and the UK are significantly ahead of the yields from European government or investment grade corporate bonds. In addition, rents are generally secured by relatively long term lease contracts which produce stable, transparent and predictable earnings,’ he added.

It will be an interesting year according to Colette Ord, director of investment company research at Numis Securities. ‘There will be selective value and income opportunities for investors where discounts to NAV and /or well covered dividend yields exist. However, given the varying speeds of economic recovery internationally, close attention must be paid to the geographic and sector mix of each portfolio as well as the leverage position of each fund. Given the mixed outlook for property fundamentals, asset management skills will be a key differentiator,’ she said.

Annabel Brodie-Smith of the AIC said the views of managers are encouraging. ‘It is clear that the unprecedented growth in the past six months clearly cannot be maintained but for investors that take a long term view, property is an important asset to hold as part of a diversified portfolio,’ she said.