Income set to underpin property returns in 2018



Ainslie McLennan, Co-Manager of the Henderson UK Property PAIF, believes that asset management and income protection will be key to delivering returns from UK commercial property in 2018.

What lesson have you learned from 2017?

We learned plenty over 2016 and 2017 has been about applying this extra knowledge to the portfolio.  We are always looking to make sure it is future proofed, particularly in terms of the rental income but also to help protect and, where we can, grow the capital value of properties. During 2016 we implemented a big repositioning that was finalised at the beginning of 2017. We implemented a significant reduction in the weighting of West End of London offices to zero. The fund still owns a few offices within the capital that have useful tenant profiles and that we believe are less likely to be affected by changes in the wider economy.

We also reduced the fund’s allocation to regional offices (outside of the South East) to zero. As a result we have focused our main office weighting to the South East for demographic and work force reasons. We believe that the diversity of business here is strong and should be sustained over the next 36 months.

The fund’s alternatives assets, which we think are helpful for an income-focused fund, in the main have very long leases, with approximately one third having leases that either have inflation-linked increases or fixed increases.

We have been positioning the fund to protect investors from any potential fallout as we go through the process of extracting the UK from the European Union, making sure that the fund’s income is as steady as it possibly can be.

What are the key themes likely to shape the UK commercial property market in 2018?

In terms of a key theme that could start in 2018 and flow through to 2019, the research consensus view is that the London office market should see some capital declines. The currency benefit of a weaker pound for overseas investors has meant that there is still quite a bit of investment activity in that part of the market, particularly for trophy-style assets. We expect this, however, to taper off and for there to be a shift down in the capital values of West End and Central London offices, which supports our reason for reducing the weighting in the portfolio where we had strong outperformance over the period in which these larger assets were held.

Overall, the UK commercial property market looks relatively stable. It has been a good year in terms of returns and delivering on income. We are very mindful that income is a key reason why investors are invested in funds like the Henderson UK Property PAIF. We continue to work hard to ensure the vacancy rate stays low by forensically looking at the tenant base, making sure the companies that occupy the properties owned by the fund are likely to be financially robust for the foreseeable future.

We have also implemented a lot of work on portfolio asset management, such as refurbishment work or renegotiating existing leases, to help protect capital values and the fund’s occupancy rate. Even with tenants in situ, there are plenty of things we can do to increase value and I think 2018 will be about trying to capture as much of that as possible from actively managing the portfolio. 

Where do you currently see the risks within your asset class and where are the most compelling opportunities?

Some of the most compelling opportunities in the market are within alternatives. This sector has been one of the most traded areas of the market over the last year as it becomes an increasingly popular and very normal holding in a balanced property portfolio. I believe we bought into the sector early enough and at favourable yields to have enjoyed some of the performance from these assets. Examples of alternatives include care homes; private healthcare; leisure facilities such as gyms, hotels, cinemas and restaurants; and data centres which, once investors have a good understanding of them and are buying into the right locations, are very good income providers. We believe that this part of the market is a good place to have an overweight position for a fund of this style.

Risk management remains focused on keeping the vacancy rate as low as possible to help the fund deliver a steady stream on contractual rental income. The risks overall are more at the macroeconomic level, based on the wider economic and political backdrop. We believe that the property portfolio is well positioned; the underlying reasons to invest in property look appealing across the UK for the areas we like. We think UK commercial property can accommodate small rises in interest rates and is not something that we feel is a particular risk. Making sure that rental income is still coming to the fund and that we are managing the vacancy rate is a huge focus for us and will continue to be over the next 12 months.

Discrete year performance – Henderson UK Property PAIF / Feeder Fund

Source: Morningstar as at 29/09/17, bid to bid, net of fees, mid-day pricing, net income reinvested.

Past performance is not a guide to future performance.


Alternatives sector – includes assets such as cinemas, gyms, hotels, food outlets, restaurants and care homes.

Asset management – can include refurbishment work to improve valuations and attract a better quality of tenant, changing the planning use of assets to increase rental revenue, or renegotiating existing leases to extend tenancies.

Average lease length – The average time to expiry of leases across a multi-let asset or a portfolio. It is weighted by rental income and assumes that all tenant break clauses will be exercised.

Commercial property – Any property asset used for commercial purposes. Commercial property has three main sectors: retail, office and industrial, the largest of which is retail.

Fixed kickers – periodic rental increases at pre-arranged dates in the lease.

RPI/CPI-linked leases – periodic increases in rent based on the retail prices index / consumer prices index measure of inflation.

Vacancy or void rate – The proportion, usually expressed as a percentage, of a property or property portfolio that is without a tenant. Individual properties with higher vacancy rates can be less attractive to investors looking for stable long-term income, but may be more attractive for asset managers looking to add value through asset management activity.

Yield – A measure of the percentage of income return you receive from a property investment. This is calculated as the gross annual rent generated by a property, divided by its current valuation. It is possible to calculate how much rents have increased or decreased since acquisition by using the original purchase price instead of current valuation.

Yield shift - Movement in the yield of a property asset, or like-for-like portfolio, over a given period
The views are those of the manager at the time of writing and should not be construed as investment advice.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Janus Henderson UK Property PAIF

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

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Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

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Specific risks

  • This Fund is dual priced. The price at which you buy shares/units in the fund will incorporate the transaction costs incurred in buying physical properties. When you sell shares/units in the Fund the price you sell at incorporates the transaction costs incurred in selling physical properties. The difference between these prices is called the ‘spread'. This spread is currently c. 5% and reflects the high transaction costs of buying and selling commercial property. Typically the buying price of an individual commercial property can be 7-8% higher than the selling price. The spread of the Fund is not fixed and may vary over time depending on the composition of the Fund.
  • Some or all of the Annual Management Charge and other costs of the Fund may be taken from capital, which may erode capital or reduce potential for capital growth.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund contains assets which may be hard to value or sell at the time and price intended. In particular, property investments may take a considerable time to sell. When many investors want to sell their shares, the Fund may have to delay processing requests so that certain assets or properties can be sold first. This is known as deferring redemptions.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Valuations are determined by independent property experts. The valuation of property is generally a matter of valuer's opinion. The amount raised when a property is sold may be less than the valuation.
  • Tenants in the Fund's properties may become unable to pay their rent. As a result, the Fund's income may be impacted and further costs incurred.

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