September 2007

PAST PERFORMANCE: A clear property outlook

"The property market has reached its peak in the UK, but the property markets in Singapore, Hong Kong and India are not even close" - Niklas Tell / Tell Media Group niklas_tell.jpgAfter a good run in 2006 and with rising interest rates and markets being in turmoil over the subprime troubles in the US one would be forgiven for thinking that property has nowhere to go but down from here. Andrew Jackson, the property manager at Edinburgh-based Standard Life Investments, still sees value in property around the world. The only cloud on the horizon would be a recession in the US. Jackson is the manager of UK- domiciled Select Property Fund and the recently launched Luxembourg Global Reit Focus Fund. The two funds are similar, except for the fact that the Select Property fund also invests in direct property whereas the Global Reit fund does not. At the end of June, the Global Reit Focus Fund, which was launched in January this year, had some e86m in assets under management. Some 38% of assets sat in the ten largest holdings. The Select Property Fund had some e2.3bn in assets under management and with 39% invested in the largest ten holdings. Of the ten largest holdings in the Select fund, six are found in the top ten of the Global Reit fund. Performance of the Select Property Fund has been excellent so far. It was far ahead of its category peers in 2006, according to Morningstar (Sector Equity Real Estate Indirect) and also so far this year. Substantial volatility in equity markets and rising interest rates does not, however, sound like the perfect environment for property. That is where the benefits of a global property vehicle come into play, according to Jackson. The property market is not global, but depends more on local economic cycles. He says that the market has reached its peak in the UK, but the property markets in Singapore, Hong Kong and India are not even close. Even if globalisation is making the world ever more interdependent Jackson is not seeing any convergence in the property cycles around the world. And even if there are more global property managers today, individual property markets around the world are still dominated by local players. Rising interest rates is normally not a big problem for real estate investors as the reason behind the rise typically is rising inflation and property is a decent inflation hedge as managers can charge higher rental rates for office space. This time it is different. Interest rates are rising because real rates have been too low. “Property owners get the negative impact without being able to offset it with higher rental rates. Of course that is a negative. But it is mainly negative for the US, Canada and the UK,” says Jackson. The Select Property Fund, which was launched in October 2005, had some 20% invested in direct property (bricks and mortar) at launch. This was reduced to some 10% as the manager saw more value in listed property. Today the trend has turned again and the fund now holds about 17% in direct property. Another change since the launch of the fund has been a shift in exposure from Europe, the UK and US to Asia. The recent volatility has, however, created some opportunities, again in the US and Jackson says he can buy listed companies at 20-30% discount to underlying value. “Listed property has fallen too much. The fundamentals are still in place in the US and I’m happy to use the volatility to increase our exposure to office Reits,” he says. So, with opportunities still available in Asia and especially in India, and with renewed opportunities in the US, what can shake the property market going forward? “The one cloud is the economic activity. It would be very bad for property if the US consumer is badly hit and we enter a recession. We do not think that is likely though,” he concludes. Niklas Tell is a partner at Tell Media Group © fe September 2007

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