Q. What is the underlying methodology behind the fund?
Our Investment philosophy is key to our management strategy in which we recognise commercial property as an income-driven investment operating in an imperfect market which is cyclical by nature.
Property assets are unique and at Ignis we have dedicated asset management teams specialising in their management. The teams seek to influence and change these assets through initiatives from lease restructuring to refurbishment to maintain and enhance income streams and ultimately returns.
Risks are controlled at both an investment and portfolio level through macro-economic and property market study and analysis; liquidity management and at a portfolio level through sector range exposure, asset and tenant concentration, tenant covenant analysis and income benchmarking.
Q. Is more focus placed on region and sector, or on the specific properties?
The decision on which asset we buy will continue to be determined, first and foremost, by the characteristics of the asset itself. We believe in assets with strong physical fundamentals. Geographic locations and sector weightings do however remain important considerations. We are currently underweight in rest of UK offices, secondary shopping centres and rest of UK standard shops, whilst being overweight in West End offices, Central London retail and City offices. However it is worth bearing mind even within our ‘underweight’ sections, asset specific opportunities exist and continue to be sought.
Q. How do you see the property market performing over the next 12 months?
Our latest forecast for All Property total returns in 2013 stands at 6.2%. Returns will be driven by income with average capital values registering a modest increase over the second half of the year. Offices will again give the strongest performance of the broad sectors followed by industrial and retail. The West End, City and West London office markets will outperform the broader UK office sector. Distribution warehouses and London industrials continue to anchor the performance of the industrial sector. The retail sector continues to be pulled down by weakness in the High Street, particularly in less affluent locations outside the South East.
The risks to this forecast of total returns are now clearly on the upside. UK commercial property continues to attract global buyers – still mainly focussed on London – and is now seeing UK retail investors allocate substantial amounts of cash to property funds. There is now, in certain markets, a distinct lack of direct property assets available to satisfy this investor demand. Existing owners, rather than trade their existing holdings, are likely to chase more assets themselves. This means that any good assets that do come to market will generate fierce competition and see the prices paid for such assets rise significantly. This could well result in a larger scale of yield compression as valuers incorporate such transactions when appraising the broader market.
Q. What do you anticipate the biggest challenges will be for the fund over the next 12 months?
The case for investing in UK property in a multi-asset portfolio is clearer than it has been for a considerable period given the prospect of more modest returns for other asset classes in an environment of low real interest rates. Property’s income characteristics present a compelling argument for investment. Secondary markets remain challenging, major swathes of the retail sector are undergoing fundamental changes and more secure sectors such as central London assets and index linked leases are already fully priced. The lessons of the last decade also demonstrate that you need to be selective when investing in the asset class.
The fundamental downside risks remain related to the performance of the real economy in the UK and beyond. Weak expansion, limited disposable income growth, prolonged austerity measures, unexpected inflation, continued difficulties in the eurozone and faltering growth in major markets for UK exports all remain serious threats to the UK economy and property market.
With income continuing to drive returns fund strategy will continue to focus on tenant retention, maintaining and enhancing levels of income through effective asset management initiatives.
Q. In which areas has most value been found over the last year?
The fund’s focus on prime assets and geographical weighting towards London and the South East has proven, and should continue to be, advantageous. We have also been attracted to high quality assets in the Midlands and Aberdeen where we have seen higher income returns in markets where occupational markets are supportive. The fund continues to seek new assets to complement existing stocks that provide a blend of income security and asset management opportunities.
This document does not constitute an offer to sell or any solicitation of any offer to buy securities or any other instrument described in this document. Ignis Asset Management has expressed its own views and these may change. The data contained in this document has been sourced by Ignis Asset Management and should be independently verified before further publication or use. Neither this nor any other statement (oral or otherwise) made at any time in connection herewith constitutes an offer to sell or exchange units in the fund or any other fund or product and is not soliciting an offer to buy or exchange and does not constitute an invitation to subscribe for, buy or exchange any units in the Fund or any other fund or product in any jurisdiction where the offer, sale or exchange is not permitted. Potential investors are advised to obtain and review independent professional advice and draw their own conclusions regarding the economic benefits and risks of investment in the fund as well as the legal, regulatory, tax and accounting aspects in relation to their particular circumstances.