MAY 2012 Let’s do it for good returns
Top-quartile performance by the Ignis UK Property Fund is founded on predictability, strong liquidity and risk aversion, and the key driver of profits is rent paid by tenants.
GEORGE SHAW Lead manager, Ignis UK Property Fund
The Ignis UK Property Fund holds a high- quality, bricks and mortar portfolio of well-diversified real property assets. It is a far cry from the giddy days of the com- mercial property boom, but predictabil- ity, strong asset selection, careful asset and liquidity management together with a due regard for risk have brought their own rewards in the recent difficult cli- mate for the asset class.
The property team at Ignis Real Estate is led by Gary Hutcheson, supported by four investment directors and 10 portfo- lio/asset managers. The investment directors are responsible for fund strat- egy and portfolio construction, for buying and selling property, while the portfo- lio/asset managers are responsible for maximising returns from the existing portfolio through rent reviews, letting activities and identifying opportunities to add value. In addition, Ignis Real Estate has its own dedicated research team, finance and operational specialists giving the business unit a current headcount of 34. The overall lead manager on the Ignis UK Property Fund is George Shaw. The team works with four main prin- ciples: that property is an income-driven investment and therefore managers need to actively asset manage to maximise income; that property operates in an imperfect market and therefore it is pos- sible to add value through strong indus- try relationships and identifying opportunities; that the market is cyclical and this cyclicality can be exploited; and finally, that property assets are unique and have characteristics that can be influ- enced and changed through direct action by the manager.
All these aspects are covered in Ignis Real Estate’s process. The research team, together with the investment specialists, work together to build a house strategy and outlook, which cover both the over- all market and individual sectors. This is “mapped” onto the fund’s strategy. Shaw says: “I am responsible for stock selec- tion. I look at the strength of the asset, the performance outlook and risks. There are rigorous processes around investment activity before assets are bought or sold.” In acquiring new assets, the team
have been involved in a mixture of open- market and off-market transactions. The investment team members are all quali- fied chartered surveyors and have wide industry contacts, which is beneficial in trying to source new opportunities. All properties are considered, with a focus on income as the quality of the rental income stream from tenants is a significant dri- ver of returns.
Shaw adds: “Fundamentals are absolutely key given the continued weak- ness in occupancy markets. For the time being we are not moving too far up the risk curve, though there will come a time when we look to do so. The eurozone cri- sis and weak economy is firmly back on the front page and so we are still rela- tively cautious.”
But the managers also take a proac- tive approach to asset management. Shaw says that income protection and enhancement has been particularly important in recent years. He adds: “Property assets are unique and the income profile can be shifted. We aim to manage and enhance income throughout the life of an asset. Part of our job is also selecting appropriate specialists – select- ing the right person to undertake rent reviews, for example, or using specialists to work with us to enhance value.” The fund also has a rigorous liquidity management process, a testament of which is that during the commercial property downturn of 2008, the fund did not have to engage in forced sales of prop- erty and it remained open to investors for redemptions at all times.
This risk management discipline extends to the diversification of the port- folio. The fund is currently spread simi- larly to IPD across the three main commercial property sectors in the UK – retail, industrial and office – although within these main sectors there are spe- cific focuses, for example, towards Cen- tral London offices, and assets in the south-east of the country. Last year, the fund invested about £120m in new assets across all sectors. The managers are equally careful in their tenant selection, ensuring that the fund is not over- exposed to one individual tenant. The fund now holds 58 properties, containing 265 tenants, of which no one tenant makes up more than 3% of the fund.
Stock selection and particularly a focus on quality has been important in what remains a very difficult climate for commercial property. This has been par- ticularly true in the retail sector, which
continues to struggle with declining con- sumer confidence. Shaw says: “We are still invested in high street retail, but our properties are in locations such as the King’s Road in London, Sevenoaks or Tunbridge Wells. We have tended to focus on the top 20 towns. The area under the most pressure is secondary/tertiary retail, and retail centres which are over- supplied. The retail sector is also starting to see the influence of e-retailing. It has already made inroads into books, DVDs and games, and it is only a matter of time before it cuts into the bigger-spend areas such as food and clothing.”
‘ ‘ For the
time being we are not
moving far up the risk curve, though there will come a time when we look to do so
The fund’s tenants include high street staples such as Waitrose and M&S. The fund has also sought to avoid property that is over-rented – i.e. contractually committed to a rent higher than the mar- ket rent – which is a feature of the current retail market. The fund remains focused on the prime end of the market, defining prime as simply “high quality”. In more normal markets, the fund might look fur- ther up the risk curve, but is always likely to have a quality bias across its holdings. A further consideration is the fund’s geographical focus on London and the south-east, which makes up around 60% of the overall portfolio and where economic forecasts are strongest. Performance on the fund has been strong and it now sits top quartile over one and three years. Over three years, it has delivered 32.2% to investors com- pared to a sector average of 21%, accord- ing to Trustnet. Performance has been driven by stock selection and judicious management of the underlying proper- ties, but liquidity management has played an important role as well. The fund also has a strong asset review discipline with each property hav- ing its own asset plan. Shaw says: “We are forecasting the performance of each individual asset and we dispose of those assets that are not performing or that no longer fit the portfolio if we decide to weight towards a particular area. Our current preference is for multi-tenanted assets, where we can undertake pro- active asset management.”
At the moment, the fund has a 3.5% dividend yield, according to Trustnet, and aims to achieve income and capital growth through investing predominantly in UK real commercial property. This is a high-quality, proactively managed bricks and mortar property fund that should give investors quality exposure to UK commercial property.
FUND PROFILE
35
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