Finding Property Income Despite Brexit

Janus Henderson's Ainslie McLennan discusses the opportunities for growth and income across the UK property market unaffected by Brexit

Emma Wall 5 March, 2018 | 2:01PM
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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 Ainslie McLennan, manager of the Janus Henderson UK Property PAIF.


Ainslie McLennan: Hello.

Wall: So, Brexit, of course, is dominating headlines and in the residential property market, particularly in London and the Southeast, we have started to see negative implications for property valuations. I suppose the key question is, is this translating into commercial property.

McLennan: Yeah. So, commercial property has actually had a pretty steady time. Over the last 12 months the PAIF itself has done 8.7%. So, I think, we have delivered not just a steady return but actually a bit of capital growth. So, it's not been the same as the residential market. Seeing that, we've done quite – as a fund team done quite a move away from Central London offices, which I think have always forecasted to have a bit of decline. That decline has not come through as yet and has been, I think, underpinned maybe by that overseas investor who is still taking the benefit of the currency story to enter into sort of that trophy style asset.

But I feel probably slightly more sanguine about that part of that London story and that London part of the market because we have done such a strong down weight. I think that there, of course, is a shift taking place in the residential market, but we are really looking at quite a flat year for the U.K. commercial property story and that's really because the income story is so locked in and secure.

We have still got the benefit of a very long lease structure and the average tenure on a fund like ours is 10.3 years. It's got that much more long income style feel to it. And that holds the value where the residential market operates very differently and where is let very short leases. And capital values had got quite steamy in that part of the market anyway. So, maybe there is a rebase to come through in residential regardless of that Brexit story.

Wall: And I think that's an important point to make, because when we've been talking over the years, even pre-Brexit you've always been careful to articulate – to differentiate between London and the Southeast and the rest of the U.K. because they do have different drivers, those markets, don't they?

McLennan: They do. The demographic is different. The workforce is different in terms of the diversity of the business base and that can be useful. When we are looking across the sort of more regional plays, we are very much likely just sixth in distribution. It lends itself naturally through the rural infrastructure and ports to lots of different locations around the U.K. and that's doing very well for us and has really been last year one of the top performers for us and actually for the past three years.

The alternative sector as well, I think, it's important to look at demographics. We are very all caught up in this fog of Brexit and it's frustrating for all of us. But if you look at sort of long-term trends that we can be invested in, if you look at healthcare, if you look at care homes, there's a very strong demographic story for being invested in the right locations in there. There are often regional stories. So, we often take these regional positions in different parts of the market. Now, that classic office market, in fact, we have down rate to 0% in regional offices.

Just as a sort of batten down the hatches, if Brexit does get tested, I think that tenant base would be tested. It would be difficult to keep buildings fully let, it would be difficult to push rents forward. And so, as an income-obsessed fund, we shouldn't be taking risks around that. So, we are looking much more where we are regionally placed, long leases and much more of the RPI-style lease structure, about a third of income currently coming from RPI or fix kickers in the lease structure across the portfolio.

Wall: And you did mention earlier currency. Obviously, one of the unintended consequences of Brexit is the fact that U.K. assets, not just property, now do look more attractive to international investors. Is that something that you are seeing within the fund?

McLennan: We have sold – where we have been selling assets – we have sold to overseas investors, but that's not a new story. We have always sold to U.K. and various different overseas jurisdictions. So, that's not new. Obviously, the slant of where the money is coming from is slightly different. So, that sort of Hong Kong, Chinese money dominating particularly for London offices.

But actually, the next biggest, I think, purchaser in the market is Continental Europe, so the Europeans taking the benefit of a bit of currency play for them. But we also have a lot of U.K. investors very active in the market and where we have been selling, we have sold to the whole array of really just about everybody including local authorities who are very active in the U.K. market at the moment and paying some big prices.

Wall: Ainslie, thank you very much.

McLennan: Pleasure.

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

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Emma Wall  is former Senior International Editor for Morningstar

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