Managing property for the long term

31/07/2019

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​Ainslie McLennan and Marcus Langlands Pearse, Co-Managers of the Janus Henderson UK Property PAIF, look back at 10 years of managing the fund together and ahead at the changing dynamics of the UK commercial property market.

What have been the biggest changes in the asset class?

During the last 10 years we have experienced a shift from balanced commercial property portfolios, only comprising office, industrial and retail assets, to now including the alternatives sector. This area of the market includes student accommodation, residential, leisure-based assets, such as gyms, cinemas and hotels in addition to data centres, private healthcare, care homes, and garden centres.

These ‘alternative’ assets have become increasingly popular and sensible diversifiers within funds because they are well placed to benefit from long-term demographic and technological trends. They also tend to attract tenants on long leases with rental income that is often linked to inflation or with periodic fixed increases. We invested into this segment early, which has served the fund well, and continue to have a significant weighting.

Technology is making the industry ever more dynamic and efficient. Take the office sector as an example. Working from home is now accessible for most employees, meetings can take place with colleagues located on the other side of the world and shared ‘flexible’ office space has become popularised amongst the freelancing community. Alongside advancements in smart building technology, health and wellbeing are also quite rightly areas of focus.

How have the changes in the retail sector affected your approach?

The expected shift in the way we shop in the UK has finally come to pass with winners and losers at a company level. Our long-held view has been that the retail sector, particularly regional high street assets and department stores, would come under pressure. As a result, early on we started diversifying away from traditional areas of the market to maintain an appropriate, broad mix of assets that we believe to be best suited to the conditions ahead.

On the flip side of the retail restructuring, investors have enjoyed the benefits of owning high-specification and well-positioned logistical and distribution units. Demand for this type of asset has grown as retailers and consumers look for efficiency in how they acquire or deliver goods. We expect this trend to continue as the shift to online shopping takes hold.

What have been your main successes and challenges?

We think that our long-standing approach of focussing on owning property assets that offer an attractive and reliable rental income stream, with some long-term income and capital growth potential, has been very supportive for investors. While markets have risen, we also see our investment decisions on buying and selling have added significant value. Recent examples include selling a single-let office in Southwark, South London, crystallising significant outperformance and buying a vacant industrial unit, which we subsequently let to Amazon. We have tried to be very front foot about actively selling or buying assets where we see opportunities to benefit investors.

The other main success has been growing, and enjoying working with, such a stellar team who are all extremely dynamic and talented individuals that are crucial to implementing our investment strategy.

Challenges include the elusive and much discussed topic of Brexit, which has felt like planning for nobody knows what! It has, however, led us to adopt a more defensive strategy that we believe should be able to sustain itself through any upheaval that comes to the fore when the UK leaves the European Union.

Have you ever revised your investment philosophy?

We regularly challenge ourselves on the approach but have had the view from the beginning that a daily-traded fund should aim to have a very large amount of its assets in core, well-located, well-connected, well-let, energy-efficient property that is relevant for the businesses of today and that the disruptors forming tomorrow’s enterprises would wish to occupy. We define core assets as being top class in at least three of the following five criteria: location, quality of tenant, lease duration, lease structure, and building specification.

Has sustainability become an increasing focus?

Sustainability has always been an important element of our investment approach. In our view, it is just the right thing to do and helps mitigate depreciation, lowers operational costs and helps to prevent building obsolescence.

We strive to improve on absolutely every level with regard to responsible property investing.

For example, we have installed photovoltaics (solar panels) on the roofs of many of our assets and are considering installing them in car parks too. We have electric vehicle charging points in car parks, 4d boxes in buildings providing live-time data that shows where energy is being wasted and where efficiency could be improved. More recently, for instance, we have focussed on the living wage for staff that provide security or cleaning services associated with buildings owned by the fund.

What is your outlook for the asset class?

We believe the fundamentals are relatively stable for the sub markets that we choose to have exposure to. It’s such a dynamic and interesting time to be in the industry and we have the opportunity to help maintain, improve and create excellent buildings and spaces for businesses to occupy and investors to benefit from.

Our expectation is for steady returns from the asset class dominated over the medium term by income, with potential ‘wins’ from asset management – delivering longer or more favourable lease terms and refurbishments – to add income and capital growth wherever possible.

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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Important information

Please read the following important information regarding funds related to this article.

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.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

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.

Information on this document is on Henderson's best endeavours.

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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