Property – active management boosts returns

George Gay of the BMO Property team highlights the benefits of active management in securing a higher income from property assets.

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Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

George Gay of the BMO Property team highlights the benefits of active management in securing a higher income from property assets.

Income is one of the key attractions of property, both in absolute terms and relative to other asset types.  From a credit risk perspective, BBB-rated bonds offer an appropriate comparison, and the relative attraction of property is clear.

BBB yield vs EPRA dividend yield

Source: BMO Global Asset Management and Bloomberg as at 1 March 2019. Past performance should not be seen as an indication of future performance.

There are pros and cons to be considered, however.  To derive yield from a corporate bond you simply buy it and hold it, whereas with property – a physical asset – upkeep and management are required.  If done well and in the right conditions, however, there is scope to grow the rental yield.  In other words, there is nothing ‘fixed’ about the income from property.

Targeting pockets of rental growth

Right now, we are upbeat about the prospects for rental growth in key sub markets and are actively focusing on well-placed locations, sectors and buildings.  The flexible hybrid structure of our Property Growth and Income Fund enables us to do so.  Through our listed holdings – accounting for around 70% of the portfolio – we’re able to target pockets where strong and improving tenant demand combine with supply constraints to push rents higher.  Strong incumbent names in Stockholm, Paris, Madrid and Barcelona offices, residential property specialists in Germany and logistics infrastructure across the continent all currently fall into this category.
 

Revamping Reading office space lifts rental value

Around 27% of the portfolio is currently in UK physical assets.  We own 28 buildings – each of which are small liquid lot size – totally focused on industrial and office premises.  Within industrials, the portfolio is primarily comprised of distribution and manufacturing assets and, geographically, exposure is orientated towards the South East because of its strong economic characteristics.

Risk Disclaimer

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The value of directly held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Related capability

Real Estate

Before revamp

After revamp

As with our listed holdings, we look for assets where rental growth is possible thanks to the supply/demand dynamic.  Maximising that potential requires an active approach but by being focused and hands-on, an owner can reap real dividends when it comes to securing and growing income.  Forbury Court in Reading illustrates this well.  We bought the office for £2.2m in 2011 with an estimated rental value (ERV) of £15 per square foot (psf).  Situated less than 150m from Reading Station, the five-floor building is undergoing a striking transformation.  Phase one is complete with revamps to the exterior, vehicle access, common areas and several of the floors.  Phase two is currently on site and includes adding valuable space previously occupied by the buildings air-conditioning system, which is being relocated.  Our first letting is to an existing tenant who has agreed to rent the newly refurbished 4th floor at £34psf – a significant uplift on £22.50psf they are paying on their current floor.   Despite the macroeconomic woes, there is good interest in the remaining floors.

2011 (purchase) 2014 2018

Valuation

£2.2m

£2.9m

£5.4m

ERV

£15psf

£20psf

£32psf

Capital expenditure

-

£75,000

£1,300,000

Source: BMO Global Asset Management

Related capability

Real Estate

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