Market review

Brexit Property update - Peter Lowe

Peter Lowe discusses what's the outlook for UK property given Brexit and the upcoming election.
December 2019

Peter Lowe

Director, Fund Manager

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With Brexit hanging in the balance, a general election now weeks away, persistently low interest rates and high street store closures soaring, many investors’ eyes are on property. Buy what are investment companies’ views on the sector and what does the future hold for this asset class?

With assets totalling £15.9 billion, investment companies investing directly in property make up a large part of the investment company industry. Across the five sectors investing directly in property, these companies give investors access to a considerable variety of different property types, ranging from offices and shopping malls to supermarkets, social housing and warehouses.

At £10.7 billion, the Property – UK Commercial sector accounts for more than half (67%) of direct property-focused assets under management. The sector, with an average yield of 5.1%, may also be attractive to income-seeking investors in the current low interest-rate environment, and investment companies in this sector now stand at an average 1% discount.

What impact is the political uncertainty and Brexit having on UK property?

The impasse at Westminster and the prospect of a change of government is destabilising for the market. The UK is a vibrant, capable economy with a skilled workforce and many comparative strengths, but the continued delayed have paralysed business and are adversely impacting the economy.

The most immediate impact of the continued uncertainty on the real estate market is the collapse in transaction volumes which have fallen sharply and are now below long-term averages. While there will be continued near-term disruption and the potential for ongoing volatility in markets, the sector is in relatively good health and offers much for the medium-term investor. There is plenty to like about UK real estate, not least the yield premium, income growth in most sectors outside of retail, good levels of occupancy for quality stock and a relative absence of typical ‘late cycle’ behaviour in the lending and development space.

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Let’s talk about risk

The value of all stock market investments can go down as well as up and you may not get back the full amount originally invested.

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.

Past performance is not a guide to future performance.

If you feel you need specific investment advice that takes your individual circumstances fully into account, please talk to a financial adviser. Views and opinions have been arrived at by BMO and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned. 

What sort of property do you invest in?

Property fundamentals come first. We aim to deliver an attractive level of income together with the potential for income and capital growth from investment in a diversified UK commercial property portfolio. Over the last few years I have positioned the portfolio to lean more towards the industrial market, which now accounts for over 40% of current assets by value, and the office sector. These positions have been made predominantly via sales from the retail portfolio, where the smaller average lot size of the company portfolio has preserved some liquidity in a testing market, and reallocation of proceeds to other projects.

What's your outlook for the property sector?

The market is slowing. Whilst we expect single digit positive total returns at the all-property level, sector and stock selection can significantly improve prospects. Income return will drive performance and the preservation of income will be vital. Lower interest rates for longer could provide additional support for the property market, with long leases and secure income seen as a favourable alternative to filts. 

What are the benefits of investing in property with investment companies?

Using an investment company structure to hold real estate means investors can benefit from a higher exposure to the asset class itself, as investment companies can take advantage of gearing and the reduced requirement to hold higher levels of cash. With income being the bedrock of real estate returns over any extended time scale, the ability to employ prudent levels of gearing has allowed managers to enhance returns. This has been particularly true over the last few years given the yield on real estate and the comparative cost of debt.

Please note, gearing is used for investment purposes to obtain, increase or reduce exposure to an asset, index or investment. The use of gearing can enhance returns to investors in a rising market, but if the market falls the losses may be greater. 

More information

For more information on Peter Lowe or BMO Real Estate Investments (the trust he runs) including current performance, holdings and objectives, visit the trust’s website.

Contact us

Should you have any further questions please contact us.

Phone: 0345 600 6166

Email: [email protected]

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