European Property Stocks Offer Income Opportunity

Bricks and mortar property funds can have liquidity problems - but investing in property stocks don't carry the same risks

Emma Wall 9 September, 2016 | 11:28AM
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Emma Wall: Hello and welcome to the Morningstar Series 'Why Should I Invest With You?' I'm Emma Wall and I'm joined today by Alex Ross, Manager of the Premier Pan European Property Share Fund.

Hi Alex.

Alex Ross: Hi Emma.

Wall: So property's been in the headlines over the last couple of months, property funds. Because some bricks-and-mortar funds were forced to close their doors to new trades, to new money and indeed to redemptions following Brexit concerns. Now your fund is slightly different it's property equities, property shares, but is Brexit still a concern for you.

Ross: Yes. So, obviously Brexit's has had its impacts on the rate on the real estate market. As you said we have had various issues with the open ended funds. But one of the benefits we have of investing in real estate securities is liquidity. So whereas we are quite a volatile fund because we have correlation to equities. We do have good levels of liquidity by investing in companies that are listed on the stock market, which is therefore reasonably liquid.

Wall: I mean is there any contagion risk there? People see property and they get scared or as you say because it's an equity fund actually you are a little bit moved from that.

Ross: Certainly we had kneejerk reaction on the real estate securities market post-Brexit. So we saw a lot of weakness in listed property companies. I think there is some justification in some of the weakness in terms of there are areas of the property market which have been fundamentally negatively impacted by Brexit in terms of sentiments.

For example, London offices there is some uncertainty about the plans of that tenant market, and also the potential supply if buildings come online in London. But we think ultimately the fundamentals of real estate should come through. And the key fundamental attractions to real estate is really why you should be looking at property in the first place would be for its income yield. And we think the income yield on real estate today on a relative basis is attractive.

Wall: Of course income is incredibly hard to find in this market, where bond yields are being squeezed ever more. Of course the other thing about your fund is it is European. It's not just exposed to that U.K. property market. Are you seeing greater opportunities in that European section?

Ross: So, we've seen a very different market in Europe in recent months. Whereas U.K. has been clearly negative impact in terms of sentiment toward post-Brexit and on the continent probably almost been a slight beneficiary if what's happened in Brexit. In terms of what’s happening on the continent is the yields available to investors on alternative asset classes, like just for example bonds have reduced significantly.

And what that has ultimately done is reflected the attraction of alternative bond like income and we think the bond like income you can get from real estate in areas like Germany, in France, in Sweden for example. We think that income is increasingly attractive relative to what is available to you for example institutional investors elsewhere.

Wall: And how sustainable is that yield. Because there is a lot of pressure on other equity income stocks about how sustainable the yield is, just because, simply because equity prices have dome down. But I suppose with property you do get a bit of visibility about that income stream.

Ross: Yeah, it’s a very valid point. So one of the key things we are looking for is the reason why bond yields are low and why there is very low inflation is. Because there is weak economic growth. Therefore, you have to really carefully at the strength of the income stream and how sustainable that income stream is.

So what we are trying to focus on is, those areas of the property market, commercial property mainly but also residential in for example Germany is where you have sustainable income and whatever investor state of income is where there is property is well let, good quality tenants and whether the rent also affordable. And we think where that income is at least sustainable. We think there is a reasonable outlook in terms of the attraction of that yield.

Wall: Alex thank you very much.

Ross: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Premier Miton Pan Eurp Prpty Shr C acc113.80 GBP0.00Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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