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Can commercial property become a 'safe haven'?
One fund manager believes he has found a way to capitalise on commercial property without the 'Brexit' volatility.
Commercial property fund suspensions may have hit the headlines but one property fund manager believes his strategy of investing in long leases makes the asset a ‘safe haven’.
The surprise outcome of the EU referendum sent shocks through the stock market but commercial property funds came under the fiercest fire as investors rushed to redeem their cash, forcing seven funds to temporarily suspend trading.
But the concerns investors have around property are not deterring Nigel Ashfield, manager of the Time Investments Commercial Freehold fund, who believes his fund is well placed in the post-‘Brexit’ uncertainty because it invests in property freeholds.
'Long income' property is accessed in two ways: through ground rents or long leases.
Commercial freeholds with ground rents mean the property will have a ‘very long lease’ or 100 years or more, where a rent is paid to the freeholder by a leaseholder, who may also sublet to a tenant.
Ground rents are increased on a regular basis, either linked to inflation or at fixed times and the freeholder typically receives ground rents of between 10% and 30% of the full market rent.
Long leases run on a shorter timeframe than ground rents, between 20 and 100 years. Long leases are slightly less secure than ground rents and rely more on the quality of the tenant (known as the covenant), the type of property and the location.
By focusing on longer lease properties, Ashfield said the fund takes on ‘bond-like attributes’, of steady income but not at stellar levels. For this volatility trade off, the fund aims for a lower return than other commercial property funds, targeting 4% income a year. The fund has delivered a 5% total return in each of the last two years.
‘What long income property is doing is giving exposure to a high base of leases and more security, and less volatility,’ said Ashfield.
‘We target 4% income…and that is at the lower end of the risk scale and is more bond-like in expectations. [It is for those] looking for a long-term income story.’
He added: ‘We think it is a real safe haven in these uncertain times. You could be nervous about a standard commercial property fund because of the volatility, and we are offering lower volatility.’
The fact that the leases are inflation-linked is also a selling point for the fund, which should mean returns will continue to keep pace with living costs; important for the older investors in the fund who are using it to fund their retirement via drawdown plans.
There are three areas that Ashfield considers when purchasing a property; location, property type and tenant.
Eight months ago he acquired a hotel next to the Meadow Hall shopping centre in Sheffield, which is currently rented out to Travelodge.
The hotel is a top 10% performer for Travelodge in terms of occupancy and currently yields 5.8%.
‘There are three things I like about it,’ said Ashfield. ‘The first one is location, being next door to a major shopping centre guarantees decent occupancy. Two, we know the occupancy levels are very strong and a top performer [for Travelodge], and three the covenant of Travelodge is very good.’
He added that if for some reason Travelodge went bust, the location and occupancy levels mean the building would be easily rented out to another hotel chain, like Premier Inn.
The fact that companies were willing to take long leases on buildings showed they were ‘crucial to the business’, which meant they were a good investment, said Ashfield.
The make-up of the properties in the fund currently stands at 35% hotel and hospitality properties, 13% leisure, 5% industrial, 13% retail, 14% social – such as nurseries and retirement villages, and 20% mixed use.
Ashfield is ‘sector agnostic’ when it comes to new additions and is more interested in ‘local geographies relative to specific buildings’, saying the over-priced London market was not on his radar.
‘I have not got a big exposure to London,’ he said. ‘The closer you get to London, the more interest there is from other buyers and it pushes down yields and pushes up prices. It has been like that for the last few years because [investors have the mentality of] "London at any price", but that may change and we will see opportunities more centrally.’
Although Ashfield believes London opportunities will arise, he is less concerned about the impacts of ‘Brexit’, poor construction figures, and an edging towards recession.
‘I have no concerns about an impending recession,’ he said, adding that if there were one it was ‘unlikely to impact’ on ground rents or lease payments.
He is even less concerned about redemptions, stating that since ‘Brexit’ there had been net inflows into the fund as people valued his ‘defensive strategy’, which includes zero debt.
‘Debt is something that gives me sleepless nights because the bank could have a different agenda to me,’ he said. ‘I have a debt facility so there is liquidity but we haven’t had to use it yet.’
He added: ‘It’s all about sleeping at night. I tend to focus on a defensive strategy and am very conservative…That means when I am talking to people I can look them in the eye and say that everything I’ve bought is capable of doing what I’ve said.’
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by Daniel Grote on Apr 28, 2017 at 10:36