A Place in the Sun?

23 October 2019

By Ronan Kearney, Investment Manager HC Verbatim Multi-Index Funds

In a previous article, I examined the available Benchmarks in the UK for property investing. In the article, I highlighted some of the flaws inherent in these benchmarks and suggested that new benchmarks would need to be developed in order to address some of the issues around methodology. In this article, I will challenge the assumption that focusing simply on the UK for property is the best route forward.

UK property has certainly had some attractive returns during the past decade. Many private investors in hotspots such as Central London benefitted from significant gains as money flowed in from other jurisdictions. However, in this phenomenon lies a lesson. It was foreign capital looking for diversification from its home market that drove these valuation increases. This should give investors pause for thought; One: would there be value in replicating this strategy and diversifying their property portfolio into European or even US assets? And two: does this influx of capital also bring with it a risk of capital ‘flight’ that would see valuations collapse?

As it turns out, the specific risk of a poorly negotiated Brexit has led many overseas investors to take fright, and the first region to feel the impact of this was Central London. Prices have declined for 9 successive quarters according to Zoopla, and the recently published UBS index data shows that London and the South East generally has seen significant valuation falls as prices have boomed in European cities such as Munich, Frankfurt and Paris.

Of course, this is retail property, so it’s worth considering commercial property to see if there is a similar phenomenon. In the past year, countries such as Poland (up 46%), Denmark (up 38%) and Finland (up 32%) have seen huge increases in the flow of external capital into their commercial space. According to a report by Savills, the US is the largest investor, followed by South Korea and Singapore. Although the UK does continue to attract commercial investment, there is a clear switch in focus onto continental Europe by Global investors. [1]

For a UK small investor, this poses a significant challenge. How do investors gain access to European or US markets when the majority of UK funds are focused on the domestic market? To achieve this, the smaller investor will probably have to look at buying Investment Trusts or specific property shares, either as a traditional Investment Trust, or as a newer more focused Real Estate Investment Trust. The challenge for many smaller investors will be that these investments are listed on stock exchanges and may well have more volatility in their price than traditional Life Company property funds. So additional analysis will be required.

Referring back to my article of a few months ago, one possible solution to address these challenges would be a more practical benchmark of these investments that smaller investors could access on their investment platforms. Certainly, investors and fund managers do need to think carefully about whether holding their property allocation entirely in the UK is a sensible option for the next decade.

The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.

[1] BNP Paribas Quarterly commercial Property Report H1 2019