Premier fund manager Alex Ross is positioning his fund for a halt in capital growth in the commercial property sector but Thames River's James Wilkinson is keeping up his exposure.
Figures from property index providers IPD show capital growth in the sector was 13.5% in the 12 months to the end of May. However, Ross said the rise in capital values would not continue.
Ross favours smaller firms
Ross is moving away from larger companies like Land Securities, British Land and Hammerson. He said small cap turnaround firms, which convert distressed properties, would be more attractive in an environment of stalled capital growth.
Ross’s fund is 46% invested in the UK, the majority of which is in turnaround firms. He has cut the fund’s weighting in Land Securities from 9% to 6.3%.
‘We have 25% of our total exposure in UK turnaround stocks and property asset managers now, as we won’t see much more capital growth,’ said Ross. ‘I am looking to increase the position in turnarounds further as these firms will be the clear winners over the next three years as capital values stop growing.’
Last week’s Budget has exacerbated this trend, according to Ross, with both the government and consumers expected to tighten their purse strings.
Further economic weakness caused by higher capital gains tax and VAT would lead to more distress in commercial property, as tenants came under pressure, he said.
‘This distress plays more into the hands of these asset managers, as more restructuring opportunities arise where landlords with limited experience and capital are unable to survive with a lower income caused by voids and lower rents,’ he said.
Stocks that Ross favours in the turnaround space include Metric Property Investments and LXB Retail Properties.
Wilkinson’s got the London look
However, James Wilkinson, manager of the Thames River Real Estate Securities Fund, is maintaining exposure to larger property companies.
The £22 million fund, which launched in April, has 9% in British Land, and 6.5% in both Land Securities and Hammerson.
Wilkinson said: ‘We are doing what we can to avoid exposure to pretty much anything outside of London. Large companies like Land Securities, which do have exposure in the North, have exposure to prime assets like shopping centres, which we still like, and we are positive on those stocks at current stock market valuations.’
Bank gives commercial property warning
The Bank of England last week delivered a post-Budget warning that commercial property was under threat from the stagnating economy.
It said in its Financial Stability Report that recent demand from investors for UK commercial property had been focused on prime properties, but said this was now coming under pressure, warning: ‘There are recent signs of demand faltering.’
The Premier fund has lagged the IMA UK Property sector in the past year, and Ross noted that its investments in European property had affected performance following the downturn across Europe.
It returned 19.5% versus the average of 23.8% over 12 months to the end of May.
Although Ross’s fund has minimal exposure to severely distressed markets, such as Greece or Spain, regions such as northern Italy – where the fund has 3.3% exposure – have been hit by the change in sentiment.
‘Recent conversations with managements of these assets highlighted that some of the best performing assets in Europe are currently in northern Italy,’ said Ross. ‘Despite this, shares of stocks with these assets were hit particularly hard.’