Ignis UK Property fund

Ignis UK Property manager George Shaw expects a tough year for his asset class but remains positive on its long-term role as a source of income.

Property off ers a good diversifi er in portfolios, with a yield above infl ation and other asset
classes – although it needs to make that case in the current weaker market

He predicts a total return of 3.5% from commercial property over 2012, dragged down by economic pressure on the retail sector, but in the context of a 6.3% annual average for the next three years. These are both well ahead of the Investment Property Forum (IPF) consensus figures – from end May – of 1.4% from 2012 and a 5% average. Launched back in 2004, the £930m fund is based around the concept of property as an income-driven asset class in an imperfect market that is cyclical in nature.

Building on income

According to Shaw, income has been the key driver of property returns over the last 12 months and will remain so in future, in stark contrast to the massive capital gains available during the early 2000s boom.For the fund’s part, performance over five years to end May still shows the lingering effects of the subsequent crash, down 14.5% against a 20% drop in the peer group. This relative outperformance has continued against the sector’s recovery, with Ignis UK Property returning 34.4% and 2.3% over three years and 12 months respectively, against averages of 21.6% and -1.3%.With income integral to returns, Shaw says property is a unique asset class as it is possible for investors to influence and enhance this key return stream. “Our strategy involves managing this income through measures including rent reviews, lease restructuring and physical improvement to our holdings such as refurbishment,” he adds. “We continue to see income as the core driver of property returns and asset management initiatives such as handling lease expiries and maintaining lower vacancy levels are therefore at the heart of our approach.”As an example of how Ignis has managed its assets, Shaw highlights several steps the group took to improve yields on its Ellenborough House property in Cheltenham. “Following a refurbishment programme throughout 2011, we were able to restructure our lease with long-term tenant Rickerbys Solicitors for 60% of the accommodation with a 15-year deal,” he adds. “We have also found new tenants for the residue of the property, which is now 85% let. This refurbing, re-gearing and attracting new tenants is the kind of proactive management that can enhance our income stream.”Another pertinent example is the Bligh’s Meadow Shopping Centre in Sevenoaks, where Ignis has managed its tenants actively through rent reviews to drive the income forward. At present, 70% of income is from strong national retailers such as Marks & Spencer, Monsoon, Laura Ashley, Gap and Dorothy Perkins, with a further six new tenants added to take occupancy up to 96%.Since the downturn in the property sector began in 2006, Shaw says the asset class has returned to its long-term return profile, swapping massive fluctuations in capital value and tracking equities for solid yield and steady growth. “When talking to clients our line is that commercial property will produce steady positive total returns, made up primarily of around 6% annual income with some capital growth,” adds Shaw. “For us, property offers a good diversifier in portfolios, with a yield above inflation and other asset classes – although it needs to make that case in the current weaker market.”Across the sector, many capital values remain below their boom peaks despite the recovery of recent years, and the weakening economy in 2012 has caused another dip, although not to the extent of dragging total returns negative. Property delivered a total return of 0.8% in the first quarter of 2012 according to the IPD Quarterly Index – and values have continued dropping since – representing the weakest performance since the market turned in Q2 2009.

Risk aversion

Shaw says the febrile investment climate is having an impact on sentiment towards commercial property as investors’ move towards extreme risk aversion. Much of the weakness has been in the retail area outside London, with consumer problems and over-renting continuing to play on this sector. Overall, the manager is confident some parts of the market will get back to previous highs although he says the gulf in performance between prime and secondary assets is expected to remain in the short term.That said, many higher-yielding secondary assets are starting to deliver higher income returns that reflect the additional letting risk. Looking at the portfolio, Shaw says the process focuses on asset selection and retaining/enhancing the income stream, with strong biases at present towards prime properties in London and the South East. With 59 holdings in the fund, it is well diversified in terms of sector, income and tenant, although the latter is skewed towards the high-quality end. At the end of May, 65% of assets were in London and the South East, with 19.5% in the North and Scotland, 10.5% in East Anglia and the South West and just 5% in the Midlands and Wales.Retail is the highest sector allocation at approaching 44%, with 31% in offices and 22% in industrial, with tenants including the government and large businesses such as Waitrose, DSG and Monsoon. “We keep to liquid stock sizes and avoid being over-exposed to single areas of the market or tenants to manage risk,” adds Shaw.