Income and opportunity
In terms of recent activity, the team has continued to focus on properties offering the desired blend of high-quality income and asset management opportunities. Purchases have included Southern Cross Distribution Park in Southampton, which is fully let to CTC Aviation Services, Southampton University Hospital NHS Trust, Smiths News Trading and CLF Distribution. “The economic forecasts that underpin our property models continue to suggest the South East and London off er greater prospects,” adds Shaw. “The West End office market remains less exposed to the financial crisis given its wider tenant base, restricted supply and residential conversion potential. Weak consumer spending forecasts over the medium term contribute to limited retail rental growth forecasts – only London offers growth ahead of inflation. “Cuts in public service employment will continue and this will impact on regions that have been dependent on this sector – major city markets will become even more polarised between prime/core areas and the periphery.”
On the macro side, Shaw says it is difficult to make any predictions given the ongoing eurozone situation or qualify how this will affect that property market. But providing the UK continues on its current ‘muddle through’ trajectory – as consensus suggests – property will be relatively stable and off er attractive returns against other asset classes. “This year will continue to be difficult outside of London, with the retail sector suffering, capital values falling and oversupply and over-renting hitting performance,” Shaw adds. “London is a different story, with increasing interest from overseas investors attracted by the potential for steady income returns from a mature property market. If you go outside the capital and top 20 towns, things are very different.”
According to Shaw, capital declines across much of the county reflect an increase in valuation yields as average rents have, more or less, remained static. “The retail sector remains most susceptible to further capital declines particularly in the secondary markets where occupational prospects are weakest and assets often over-rented,” he adds. “Despite the recent decline in capital values, the prime nature of our fund’s assets, combined with its significant exposure to Central London and South East markets, means it is well positioned in the current economic climate.” Looking further out, Shaw expects the outperformance of London to narrow somewhat after 2012 and Ignis will look to time its move into stronger regional markets, selecting assets that will benefit as higher income returns compensate for lower capital growth.
Picking the best locations
While the fund remains focused on primary property, he says pricing in the secondary space is looking more attractive but keeping to assets in the best locations will be key. “Generally, investors can decide between defensive, secure strategies, target riskier markets or more likely, a combination of both – the crux will be to determine when riskier markets offer a superior adjusted return,” adds Shaw. “Performance in the short term will also be defined to a great extent by how valuers treat ‘average’ assets lying between prime and secondary – there is a threat that good assets are being written down in the absence of evidence to prove otherwise.”
Overall, he says the sector is not without its challenges but provided you have a portfolio of quality assets and work hard to manage your income stream, the sector has obvious attractions. “Property will not produce the kind of returns we saw in the 2000s but our prediction of 6.3% a year is an attractive return,” he says. “This year is providing difficult for all asset classes but we are confident in our focus on proactive income management in a portfolio with stock over sector calls and a London bias. “Sentiment remains negative as the economy struggles and the impact of the eurozone crisis on asset prices including commercial property plays out. But the stability of prime rental income streams, the yields available compared with cash and safe haven government debt and the huge volatility in equity markets represents a strong case for prime/investment grade commercial property in these turbulent times.”
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