It’s been a strange period for global investing since 2007. A little boom, a lot of bust and a period of sustained wealth creation as markets recovered from the deepest downturn since the 1930’s. The last 5 years have delivered out performance across many markets with value add and opportunistic investors achieving stellar returns with the support of very cheap debt.
If that was the party then now comes the hangover: dreary, boring and at times a little uncomfortable!
The global geo-political situation appears difficult whichever way you look. If the Arab spring of 2011 was a violent reaction to decades of suppression, the more peaceful, but equally destabilising voter revolt witnessed across “stable” western democracies in recent months offers a clear and unambiguous message to the ruling elite that the voting public has had enough of “them and us” politics and years of austerity.
If these socio-economic and cyclical trends have taken some of the fizz out of global investing, perhaps now would be a good time to consider core UK commercial real estate as the cure to any lingering investment hangover.
Core UK real estate is a long term investment. It is illiquid and is as sensitive to economic and political cross winds as other investment classes. However, patient, long term capital gets rewarded through a combination of land value appreciation and progressive income. Smart investors learn how to minimise obsolescence and keep trading costs to a minimum. Follow these key maxims, whilst keeping a keen eye on tenant counterparty risk and income duration and you are well on the way to de-risking your portfolio. In today’s investment climate, core UK commercial real estate has something akin to gold dust – a high and sustainable income return which is hard to beat from other asset classes.
At Palmer Capital our core UK commercial income fund provides investors with an annualised distribution yield of circa 5% across a UK portfolio of 22 assets diversified by sector (office, industrial, retail and others), regional geography and tenant mix. We achieve this with an average unexpired lease term of over 15 years (more than twice the market average as measured by IPD), guaranteed income progression via indexation (typically RPI) or fixed uplifts and low tenant counterparty risk with in excess of 70% of our occupiers categorised as “low” risk as measured by Creditsafe.
So, barring a calamity, we should still be distributing 5%+ in 5 years’ time and again in 10 years’ time. This is a great positon in which to be starting each year and although capital values may rise and fall, the patient investor can look beyond these short term trends.
An open ended structure and quarterly dealing help to create a more liquid wrap around a notoriously illiquid asset class. This is key as many investors make the right call to go into the sector but choose the wrong vehicle with which to execute their strategy.
When investing in a core UK commercial real estate fund, you need the ability to be a long term investor which means keeping control of your own destiny. To achieve this it is important to adopt a conservative approach to leverage (or have none at all) and ensure your fellow investors have a similar philosophy and timeframe. Large open ended funds, whilst providing access to core real estate, typically have a disparate group of retail investors that can be fickle, often follow the herd and therefore drive the manager to buy and sell at the wrong times of the cycle with consequent value destruction.
Our core income fund is unlevered and the investor base is all long term comprising UK pension funds and high net worth investors. Whilst other large open ended funds suffered forced selling following a run of redemptions post GFC and Brexit vote, we had only £200,000 of redemptions during these periods. This has allowed investors to remain within a stable fund which has enjoyed steady value appreciation over a sustained period and some opportunistic buying courtesy of £50m of fresh investor capital committed into an unsettled market post Brexit vote allowing us to be the hunter not the hunted.
In today’s uncertain investment climate, a well-executed UK commercial core real estate investment strategy can sit as a very appealing counterweight to other investment positions maintaining its appeal as a long term diversifier – a comfortable cure for your investment hangover!
By Rupert Sheldon, Head of Core REIM
Link: https://docs.wixstatic.com/ugd/cf7a10_f69cb8d02a364db48712f1c7d61d4649.pdf