Asset Allocator's Soapbox: Ross Henderson

This week: Ross Henderson, fund manager at OPM Fund Management, gets excited about quality property opportunities at deep discounts.

While conditions in property markets have improved since bottoming out in March 2009 they are still well below their peak level of Summer 2007. What the overall picture hides are the very different paths taken by quoted property companies such as REITS and the more traditional ‘bricks and mortar’ type fund over the period.

REITS bounced back from massively oversold positions where shares had been trading at huge, and in many instances, record levels of discount to net asset values. The rise in prices was driven largely by a general rebound in equity markets, and particularly to those assets perceived to be higher risk. Towards the end of the third quarter 2009 the rise in asset prices slowed and in some instances retreated, and at this time the more traditional ‘bricks and mortar’ funds began to perform. Buoyed by large inflows these funds chased assets which, as supply was limited, especially in London, pushed down yields.

Moving forward, it is likely that many of the most profitable property investments will be in those companies or with asset managers which can add value to properties, those capable of reducing voids, sweating the assets and increasing rental incomes. The companies that look best placed are those with access to capital and the firepower to take advantage of the opportunities that will inevitably arise.

Recent market weakness has given investors a rare opportunity to buy into a number of such property stocks at a significant discount to net asset value, many of which usually trade at a sizeable premium. Shrewd operators such as Raymond Mould and Patrick Vaughan know when to be in the market and when to sit on the side lines. Backing strong and proven management at this stage of the cycle seems to make sense. When Mould and Vaughan brought London and Stamford to the market they faced some criticism for staying in cash, but their patience has been rewarded with the company recently announcing full-year profits in excess of £100m.

With a secondary cash raising and potential for backing from a Middle Eastern partner the company certainly has the resources to take advantage of distressed sellers in the market which, given the current economic environment, could be plentiful.

What is particularly interesting about London and Stamford is the flexibility and nimble nature of the management. It has already demonstrated that it can add value in a short space of time, as it did when it bought an office block in Leeds, booking an astonishing 85% profit on its sale one year later. It has also looked beyond its normal office and industrial properties when appropriate, buying blocks of residential units at Arsenal’s former home Highbury and on the South Bank of the Thames.

However, it is not just UK-invested REITS that look attractive. Hansteen raised £200m of equity in 2009 and some of this pile has been used to acquire a European industrial portfolio. Fears over the company’s un-hedged exposure to the euro look overdone, and the well regarded management appear to be steering the company in the right direction with profits rising sharply. In addition to the attractive discount to NAV, the recent sell-off means that the shares now offer a significant income yield.

These are just two of the group of companies with experienced management that seem well placed to benefit from current market conditions. Other companies such as Max Property and New River also have significant undrawn firepower, and they too benefit from having no legacy portfolios to hold back performance. While these stocks appear to offer more long-term upside than the traditional ‘bricks and mortar’ funds, investors’ enthusiasm may be tempered by the fact that they will be subject to more volatility. Quoted property shares will inevitably get caught up in equity market sell-offs, hence a hybrid approach is favoured.

It is also interesting to see many UK growth and UK income fund managers allocating monies to this area, recognising that some of the companies could well be undervalued, despite the poor economic backdrop. Looking ahead, both equity and property markets face considerable headwinds, but buying quality, proven property asset managers at the present discounts available may well prove fruitful.