2 December 2023
The winding down of another open-ended fund may have cast a cloud over the sector, but commercial property could be ‘due for a rebound’ as an investment, according to wealth manager RBC Brewin Dolphin.
M&G announced the closure of its M&G Property Portfolio during October, leaving just four open-ended funds still standing after a difficult few years. In their heyday, open-ended property funds held £20.5 billion in assets under management, which has fallen to just £3 billion today, according to analysis from React News¹.
However, there are tentative signs of a turnaround in the property sector, which is still suffering from the effects of the Covid-19 pandemic.
Figures from Remit Consulting indicated that rent collection for the third quarter of 2023 neared pre-pandemic levels, with a particularly ‘encouraging’ turnaround in retail². A recent survey from Hays also suggested that the ‘return to the office’ is gathering pace, with more workers back in their workplaces full-time than during the same period last year³.
The FTSE Real Estate Investment Trusts (REITs) index has delivered a negative total return – its share price change and any dividend income – of around -28% over the past two years, while the FTSE All Share has provided just over +5%. But, as the economic drivers of the past two years begin to ease or go into reverse, commercial property may be in line for a recovery, says RBC Brewin Dolphin’s Rob Burgeman.
Rob Burgeman, senior investment manager at RBC Brewin Dolphin, said: “Many of the sectors that have been hit hard by rising interest rates and the after-effects of the pandemic are due for a rebound – property is a good case in point, particularly when it comes to closed-ended funds. Generally, property has a value – these are real assets which typically provide reasonable returns and are not as volatile as equities. Yes, our relationship with property, and how we use space, is changing; but we will still need it.
“What is happening with open-ended funds has been in the post for a while. There was an inherent mismatch between giving investors daily trading on what is fundamentally an illiquid asset. What’s more, if investors head for the door, the fund becomes a forced seller, which is an unenviable position to be in. Prices become precedent – they become evidence for future deals – and that can become a vicious cycle.
“You, therefore, generally want to be in closed-ended funds, or REITs, when it comes to property. However, REITs have not been without their challenges – many REITs have ballooned to -40% discounts to their net asset values (NAVs), the combined value of their holdings. I haven’t seen the discounts of listed property investments fall to these levels since the early 1990s.
“The issue is more to do with the value of the properties. When you can receive 5% on cash and your office building yields 6% in rental income per year, there needs to be an adjustment to reflect the risk and costs of owning the property. That usually comes in the form of its value dropping to boost the yield, which we have seen play out in the property sector with falling share prices.
“The market has been indiscriminate with property – that creates opportunities for the discerning investor. When interest rates start to fall, we could see a serious re-rating in the other direction. But, remember, the biggest discounts on REITs may be on trusts that are closest to financial trouble with their assets – many of these will have been bought with debt that is in the process of being refinanced on very different terms. Speak to a professional adviser before making any significant financial decisions.”
TR Property – Rob said: “TR Property is a fund that offers exposure to REITs and property companies in the UK and across Europe. Its share price discount to NAV has been widening and it currently yields just over 6%. The fund is a very popular choice in the sector, given how broad its asset base is – but returns have been poor, with a -31.81%4 total return over two years. It could, however, be one of the biggest beneficiaries of the drivers of the past year going into reverse.”
Primary Health Properties – Rob said: “Primary Health Properties is a specialist REIT in the healthcare sector – as the name suggests, it invests in assets like GP’s surgeries, clinics, and other buildings critical to the delivery of NHS services. Over two years it has delivered a negative total return of -26.58%5, even though it has one of the most secure tenants you could ask for. Yes, NHS spending is under pressure, but it also runs a tight commercial operation. PHP provides a yield of 7.7%6 and has managed to grow its dividend by a healthy average of 4.42%7, over five years – it feels primed for future recovery.”
iShares UK Property – Rob said: “If you want quick and straightforward exposure to the UK property market, the iShares UK Property ETF could be the way to go. It tracks an index of listed property companies. It has performed slightly worse than the REITs index, but if you want cheap access to returns from UK property then this may not be a bad option for the years ahead.”
Five-year discrete performance:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| FTSE REITs Index | -12.42% | 30.78% | -16.20% | 29.43% | -31.58% | 3.62% |
| FTSE All Share | -9.51 | 19.09 | -9.73 | 18.29 | 0.23 | 3.76 |
| Primary Health Properties | -0.2 | 50.58 | -0.8 | 3.16 | -23.07 | -4.48 |
| TR Property | -7.81 | 41.42 | -11.97 | 23.48 | -35.55 | 6.43 |
| iShares UK Property | -13.36 | 29.4 | -16.82 | 28.41 | -31.85 | 2.68 |
Disclaimers:
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.
Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 365 3456 40.
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PRESS INFORMATION
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NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £53.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th April 2023.
Disclaimers
The value of investments can fall and you may get back less than you invested.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 365 3456 40.
ABOUT RBC
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¹ Source: https://reactnews.com/article/and-then-there-were-four/
² Source: https://www.thetimes.co.uk/article/commercial-rent-collection-nears-pre-pandemic-levels-2mgb5gvvf
³ Source: https://reactnews.com/article/survey-suggests-return-to-the-office-is-gathering-pace/
4 Bloomberg data
5 Bloomberg data
6 Bloomberg data
7 Bloomberg data