Fund Manager Q&A: Threadneedle UK Property Trust
What is the underlying strategy of the fund?
The objective of Threadneedle UK Property Trust is to obtain a total return based on income and capital appreciation primarily through investment in UK commercial real estate, and units in collective investment schemes.
How do you see the UK Property market performing over the next one to two years?
During 2015 the UK commercial-property sector delivered highly attractive investment return to investors. Looking to the year ahead, there are many reasons to remain positive. The general level of vacancy across the UK commercial-property market as a whole has fallen below the threshold at which ongoing economic growth triggers income growth. With the Bank of England forecasting 2015 GDP growth of 2.5% and the overall market vacancy rate falling, we expect rental-value growth to contribute a growing proportion of total returns over the coming year. The UK commercial-property market’s net initial yield still offers appeal in today’s yield-starved investment landscape. Its margin above gilt yields still suggests a degree of resilience for the property market should gilt yields rise. We do not anticipate another year in which property yields fall as proportionately far as they did in 2014, implying lower total returns for this year compared with last. However, with a greater component of this total return emanating from healthy fundamentals in the form of rental-value growth, this change in relative drivers is to be welcomed. The Trusts performance over the year to the end of December 2015, aided particularly by its relatively high yield and its strategic exposure to the South/South East markets. These advantageous positions look set to present further performance upside during 2016. Threadneedle UK Property Trust benefits from a well-balanced portfolio offering a high income return and a low vacancy rate. The portfolio is extremely well diversified and is free from the elevated risks associated with wholesale, speculative development activities. Importantly, the Trust also has an element of buying power in the form of cash reserves. Accordingly, the Trust has continued its strategic acquisition of mispriced assets, targeting properties exhibiting strong underlying investment credentials and considered to provide a significant risk premium.
What are the biggest challenges currently faced by the UK Property market?
Potential headwinds that could derail the UK Commercial Property market include, but not limited to Global recession, BREXIT higher interest rates and any further taxation increases.
Could you tell me about a couple of the fund’s holdings, and the characteristics/attributes that led to their inclusion?
Columbia Threadneedle Investments has a dynamic, award winning approach to property investment. Our experienced investment team has been investing since 1994, and the focus on maintaining high yields has distinguished us from the market. Columbia Threadneedle Investments property team has a distinctive investment philosophy which can be summarised in the following five principles: Stock picking is key We believe that specific stock selection within sectors is the primary driver of long-term performance. Our experience, resources and contacts allow us to select the most appropriate and attractively valued properties for our funds while avoiding exposure to property shares. A preference for high yielding investments We believe that over the long term, income is the dominant component of property total returns. As such, yield is a key focus of our stock selection process. Flexible buyers We do not populate our portfolios with trophy assets, as these frequently offer unappealing yields. Instead, we seek good value and investment potential across all sectors, geographies and lot sizes.Avoid speculative development This kind of activity locks up capital for long periods of time and can be risky. We prefer to buy standing investments with the potential to improve returns. Active asset management unlocks value We work hard to maximise the returns from the properties we own, refurbishing and updating buildings regularly in order to increase capital value and improve rental growth potential.
Why do you consider Property to be an important part of a diversified portfolio?
Low correlation with other asset classes and income.
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