Miton raises UK property exposure despite Brexit worries
In the latter part of 2015 and the start of this year, fund manager David Jane says the exposure to UK property was significantly reduced, taking the view there were better opportunities elsewhere – in particular in fixed income – to play its ‘lower for longer’ investment theme.
Subsequently UK real estate investment trusts (REITS) have underperformed the wider market, with much of this attributed to Brexit worries. At the same time, following strong inflows in 2015, the open-ended property sector has been subject to outflows. This has prompted a number of funds to have to change the way they are priced, which has caused some valuation losses for investors.
However Jane considers that the Brexit worries will only be a temporary feature of markets because whatever the result he does not think there will be a material impact on interest rates, sterling or UK employment, which he says are the three main factors which drive property.
“Property is driven by two factors in the longer term; interest rates and employment,” Jane says. “Interest rates drive property values because of the ease with which money can be borrowed. In the commercial sector the majority of companies use debt to a lesser or greater degree to enhance returns, so movements in short and long term interest rates have a significant effect on property values. The fact that interest rates have been falling, and have remained low for a long period, has caused a benign background for property investors.”
Another factor that drives property values is rents and tenant demand, which Jane says is ultimately driven by employment and wages. He explains: “Commercial property is an opportunity to employ a worker, so wages and employment growth are major drivers of property values, the majority of property value being offices.
“The next big economic driver is retail spending which drives retail property growth. Of course retail spending is driven by wages and employment so it is safe to use employment incomes as a proxy for rental growth in the long term. This factor we would be less constructive on in the long term, but we are not expecting a recession in the near future.”
With the Brexit unlikely to impact on these three factors, Jane says ultimately they should now be more positive on the prospects for property as an asset class in the UK and this is being put to work in their multi asset funds.
“We have recently made some tentative re-investments in the property sector via UK REITS,” he says. “We hold our exposure in the form of REITS, taking the view that the liquidity and absence of pricing basis offset their greater exposure to movements in equity prices day-to-day.”