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Perfect time to buy commercial property, says Threadneedle
Don Jordison, manager of the Threadneedle UK Property Trust, says now is a once-in-a-generation opportunity to buy commercial property.
Jordison feels that prices are more distressed than at the height of the financial crisis in 2008, and has done more deals in the past two weeks than over the past six months combined.
'You have a moment in time that is five years from the top of the market. [It is] a point at which many five-year loan deals were structured, and we are seeing those unwind with the need for refinancing or crystallising their losses; this means there are many sellers coming back to the market,' he said.
Cash 'war chest'
This plan of buying when the market sells and selling when the market buys is a core philosophy for the fund. Jordison, along with co-manager Chris Morrogh, has been running a high-cash position for a number of years, with a quarter of the portfolio – £100 million – kept in ‘dry powder’ in anticipation of this moment.
He concedes this has been a drag on performance, but it is not a market for indiscriminate buying because of the significant transactional costs associated with property, which equate to 7.5%, mostly from stamp duty.
He has struck deals for around 20% of this cash, acquiring on the belief that the market is simply mispricing these distressed assets.
‘We are buying respectable buildings in good southern locations, some at half the cost they were to build in the first place. They are let on three- to five-year leases on yields of 15-20%, which means you are getting most of the principal back over the term of the lease. They are simply mispricing it,’ Jordison said.
Jordison and his team run assets of £7 billion with a team that has been together for 20 years. They own some 1,200 properties, equivalent to 2% of the available UK market. He believes this reach gives him an intimate understanding of every area of the UK property market in every town and an understanding of the value of each property.
The fund has more than 50% invested in southern England, on the belief that the North will in all likelihood lag the South. However, despite this only 1% is invested in London, as he feels there is an unnecessary premium paid for the scarcity of properties in London, when the same fundamentals exist throughout the region.
Backing retail property
For such a defensively minded fund, the number shops in the portfolio (36%) is surprising given the backdrop of negative sentiment around the strength of the British consumer.
Jordison counters this saying that there are very few parts of the market that aren’t rooted in the strength of the consumer market. The industrial sector is primarily warehouses for retailers, and financial services are a dependent on consumer lending.
What attracts him to shops over offices, the other major component of the market, is the lower levels of depreciation. ‘An office has a viable life of 15 years, whereas a retail tenant takes it as a shell and they do the fitting and shopfront themselves,’ he said.
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