Go Global to Avoid the Property Market Slowdown

Commercial property funds took a hit post-Brexit as fears rose regarding the future of central London property prices. But there are other global cities offering growth opportunities

Emma Wall 28 September, 2016 | 10:00AM
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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 Tom Walker, manager of the Schroder Global Cities Real Estate Fund.

Hi, Tom.

Tom Walker: Hi there.

Wall: So, a real estate fund but not like the ones that came into trouble after Brexit and were forced to close trading because you're investing in securities rather than bricks and mortar, aren't you?

Walker: That's right. We invest in real estate investment trusts and if you go back in history and look at the origination of where these REITs came from, it was because of a property crisis in unlisted real estate funds in Australia and in the U.S. in the late 1960s and 1970s. So, we are, if you like, invented to deal with this liquidity issue. So we are very different from the bricks and mortar funds.

Wall: How much contagion risk is there though? You've got that extra level of security with the liquidity buffer. But does all property related stuff gets dragged down together?

Walker: Yeah, I think that REITs will follow exactly the same direction as the underlying asset. We are real estate investors. REITs are real estate instruments, but they are obviously more liquid. So, what you find is, when you have Brexit, the listed market prices that new information instantly. So we see a fall in values because people think that the economy that the U.K. is operating in is going to reduce, so therefore property values should fall.

The bricks and mortar funds come to that same direction but just later on because they are valuing every six months or so. So, if in the U.K. we are going to see a decrease in property values, both bricks and mortar funds and REITs will follow the same direction. But we would argue in terms of our fund because we are investing in a Global Cities Fund is that those companies with assets in London should be better protected whatever environment we see post Brexit.

Wall: And it's the global nature of the fund which presumably has helped to bring returns to investors 20%-odd so far this year?

Walker: Yeah, exactly. I mean, clients in our fund have had a very good year and clients in our fund post Brexit 9% of our fund had a very bad Brexit. The rest of our fund had a very good Brexit because 9% of our fund was invested in London. The rest wasn't. And whether you're operating a real estate company in Los Angeles or Sydney, you don't really care whether we're in or out of Europe. And so, that's again the diversification benefits which we think is so important when investing across equities, across fixed income or real estate.

And the interesting thing about real estate is that not many people in the U.K. diversify their real estate exposure outside the U.K., again probably because REITs were only introduced in 2007, so it's a relatively new concept. But we think the diversification benefits have been shown by the strong returns of our fund this year.

Wall: And where are you seeing those opportunities? Is it outside of the U.K. then?

Walker: For us in the U.K. there is one market that's the most interesting, which is London, but obviously the environment has changed post Brexit. But outside the U.K. we see some very interesting companies in Los Angeles, in Boston, in Sydney or Hong Kong, all the major cities that you can think of around the world, that's really where we are invested.

We have our own website schrodersglobalcities.com; we have our own Schroders Global Cities database which ranks all these cities and then we simply try and find companies that match our requirements with assets in these cities. But certainly I think Los Angeles for us and Boston are two of the most interesting cities in the U.S. at the moment.

Wall: And is that because of demographics? Is it because of supply and demand? I mean, what's driving that idea of where is a good place to invest?

Walker: Yeah, it's supply and demand. I mean, supply is what will kill a real estate market. And if you think about London, you can think about the West end of the London, it's a conservation area. So we tend to like companies that own assets in London. There's no tall buildings in the city. In the docklands, it's different. In Los Angeles, in Western Los Angeles where there's a company, for instance, called Douglas Emmett, there's a proposition there or a special law called Proposition U, which limits the amount of new supply that can be built. So that's great from a real estate investment point of view. If we can go into a market where we know supply will be limited but there are lots of people who need to be there for jobs, for their livelihoods.

Wall: Tom, thank you very much.

Walker: 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
Rating
Schroder ISF Global Cities A Acc GBP1.47 GBP-4.92Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar