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Don Jordison, Managing Director of Threadneedle Property Services, kicks off his presentation to delegates of the Morningstar Investment Conference saying there is nothing wrong with property in the UK, rather it’s the people who buy and lend it. The returns of the past three years have been all about liquidity and the open-ended funds that have redeemed their property holdings during the crisis, he says, adding that it is a masochistic trend whereby you have an illiquid asset class being sold through open end funds.
Within property, there is always an investment opportunity, Jordison, says; property rewards the long term investor and is also “a damn good diversifier”. Jordison says property investment is zero correlated with other assets, though a delegate suggests that this lack of correlation may in fact by exaggerated depending on how it is measured. Director property, Jordison says, does not mean buying property company shares or REITs, which are subject to equity market volatility and therefore do not provide the same diversification benefits.
If you have a widely diversified portfolio of UK properties, you are going to be “okay”, Jordison says. And the UK is particularly attractive due to its ‘owners-friendly’ property market, the safe and transparent legal system, and the fact that it’s the destination of choice for most international companies.
So, why invest now? Jordison says we’ve seen a tale of two crashes and the latest crash triggered Quantitative Easing, which “might as well have been tailormade for the property market.” That liquidity powered the sector recovery, Jordison says, though he adds that the recovery has been subdued. Transaction volumes remain low and debt markets are a black cloud over the property markets, with any new liquidity in the market likely to get sucked into refinancing existing loans as banks work out their balance sheets.
Within the property sector, Jordison says commercial property is cheap versus bonds but expensive versus equities. Threadneedle sees opportunities in central London, with rents in full recovery, but warns investors against underestimating how volatile central London is – “it’s a scary market”. Other preferences include mid-rented retail warehousing, high-yielding shopping centres with a strategic town focus, trade counter parks, and index-linked rents where by rent is protected from inflation. Regarding the latter, Jordison sayd “a few of those are going to do you no harm whatsoever.”
Jordison highlights that investing in property is all about diversity and the strength of the income stream. “We don’t buy prime, we don’t buy trophy property,” he says, highlighting once again, a preference for high yielding investments.
As investors in direct property, Threadneedle’s strategy must be hugely flexible, Jordison says, as you can’t buy the market, you can only buy what’s on the market so you need to be ready to adjust to a changing market. Jordison warns against speculative developments, an area he recommends avoid: “even if it does well, all it does is add volatility to a portfolio.”
Active property management is integral, he adds, saying that if you invest in direct property you need to be prepared to roll your sleeves up. When buying property from institutions in the UK, you’d be amazed by how many have forgotten to collect the rent for the last two years, Jordison exclaims, prompting a surprised murmur from the audience.
Jordison emphasises the stock picking that goes into investing in property—you must be able to price what’s in front of you and select from those stocks as you can’t buy a sector, he reiterates. “Property isn’t about location, location, location,” he adds, “it’s about income, illiquidity and high transaction costs.”
