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Holly Cook: Richard Kirby of F&C spoke about investing in property funds at the recent Morningstar Investment Conference. I asked him, from the average homeowner’s point of view, is there any need to invest in commercial property as well, and if so, what role can it play in your portfolio? Here is what he had to say.
Richard Kirby: I think the role of commercial property in a broader portfolio is to provide a balance, a diversity. So it has a role in providing that balance against the other investment classes, and fundamentally, I think, when you look at commercial property, its total return is dominated by its income return. It can throw off a very attractive income return, potentially a very secure income return; combined with the prospects of some capital growth. Having said that, in 2007-2008 we did see some severe capital falls, so the sector is not without risk.
Cook: So at a previous Morningstar conference, back in 2011, I was talking to one of your competitors, and he described the outlook for UK property as dull. He said that London, however, was looking pretty attractive, and meanwhile, student accommodation and nursing homes he described as banana skins to avoid. Sounds like that kind of sentiment has almost switched based on what you were saying in your presentation. Would you agree with that?
Kirby: Yeah, to some extent I would agree with that. I think the outlook for commercial property now, I think, has improved. We are certainly looking at total returns this year of a smidgen under 7%, and our five-year forecasts are just over 8%. And I think in a low return environment, that’s looking fairly attractive. Back in 2011, returns from Central London would have been looking very attractive. But you’ve seen two years of significant growth there, you’ve seen overseas investors dominate the piece, 80% of investment transactions in Central London now you have some overseas involvement, and you’ve seen pricing in core Central London areas be bit too really top of the market pricing, where as a core, core plus investor I’m struggling to see value. Looking at the alternative sectors, I think, yeah, when you look at those sectors, you have to be very careful. In the past with nursing homes and you’ve seen rents set at unsustainable levels, and those properties then sold by sale and leasebacks, and you’ve seen the accidents that have happened in that sector. I think, moving forward, I think investors are very much more aware of the underlying real estate, the terminal value of the underlying real estate at the end of the lease and focusing on that. So I think lessons have been learned by the past, but I still believe that nursing care, nursing homes, student accommodation has very much a piece to play moving forward.
Cook: You mentioned the increase in overseas investment, particularly in London. How does that affect your ability to actually find interesting opportunities within the property market?
Kirby: Within Central London, I’m finding that quite restrictive, especially in core, core plus offices, retail and in the main I’ve been selling into those markets. I’ve been taking some of the chips off the table there, and that’s not really calling the tops on Central London. It’s looking to redeploy that cash into other areas of Central London, where we’re not seeing the overseas investors participate so aggressively, and where we believe we can create value. So it is forcing us to look at other areas in Central London. In the regions, we’ve only just really noticed a pickup in overseas investors looking at property in the regions. But I think it’s sustainable. I think it’s something that we’ve got to get used to. We’ve just got to use our professional experience in driving looking through stock picking, looking at local markets to be able to buy properties which we believe will perform and add value.
Cook: Richard Kirby of F&C, thank you very much for joining me today.
Kirby: Thank you.
Cook: Thanks.
