Central London weighting helps Barrie achieve property success

L&G UK Property’s Michael Barrie talks to Cherry Reynard about finding
returns in bricks and mortar

The top-performing managers in the property sector have typically been those running funds focused on equity. In contrast, it has been a difficult time for bricks and mortar property investors. Liquidity has been weak and managers have been savagely punished for holding the wrong assets. Michael Barrie, manager of the L&G UK Property trust has been a rare exception.

The fund has dipped just 0.9% over five years, compared to a sector average fall of 11.8%, leaving it fourth out of 21 funds in the sector. Two things have contributed to the fund’s outperformance: strong management of the ‘liquidity’ part of the portfolio and a high weighting to central London property.

Barrie says: “We have been heavily weighted to central London over the last couple of years. The area has had very low vacancy rates and investors get a slightly higher than average income. We are not naturally weighted to London. It’s just that is where we have seen the best opportunities. It has been a better market, there have been more opportunities to manage the assets and rent increases have been good.”

He has also made a point of using the liquidity part of the portfolio to maximum effect. The fund will always hold a proportion in cash to maintain sufficient liquidity and was one of the few funds that did not close to redemptions during the commercial property slump.

Barrie says that he wanted to ensure the cash balance had the right impact on the portfolio. He says: “For example, we took a view on shopping centres. We bought a REITs basket to track that part of the market and they have been strong performers. By and large this is a bricks and mortar fund, but we use this part of the portfolio to eliminate some of the drag effects of this type of property investment.”

In the longer term, Barrie aims to improve rental yields through better management of the property. In this, L&G can claim to have some expertise. The fund is only a small part of L&G’s large property management group. The group manages or co-manages 17 separate funds, with an aggregate asset value of over £8.3bn.

They have a number of specialists in the team and run a number of specialist mandates. One of Barrie’s last purchases for the fund was a leisure scheme, to which he was alerted by the team running the group’s dedicated Leisure fund.
Barrie will never buy simply to use up cash. He has bought nothing in 2011, for example. He says: “We never spend money for the sake of it. The key driver is the opportunity. We like to buy situations where we can manage them aggressively and outperform. In the recent markets, this has been the only way to add value.”

At all times, the fund will have a balance between, for example, office or industrial buildings. Barrie will also hold a balance between ‘safer’, low-yielding assets and riskier higher yielding assets.

The common theme is that Barrie is looking for a funding situation where there is mispricing – this can occur because someone is a forced seller, for example, or sentiment is against a certain sector of the market.

At the moment, Barrie believes there is a two-tier market in commercial property: “There has been a weight of money going into real estate on the back of demand for solid, income generated assets.

A lot has gone into London, but only enough to support the pricier end of the market. The wider market doesn’t have the same tenant security and has therefore been much weaker. Retailers are not taking the space on the high street and there are a lot of vacant units.”

That said, he is still looking at retail opportunities where they are heavily discounted and where they can be managed into better shape. He says: “These may be owned by banks and be in secondary locations in towns that aren’t the strongest. It does take a lot of analysis and it is very opportunistic.”

Barrie says the current market means he can afford to be inflexible about what he wants. He adds: “We have a five-year high in terms of cash in the portfolio. This means we can buy back in at the right time when values have bottomed-out. There is quite a lot of distress in the market and some properties are heavily loaded with debt.” Markets still favour those with cash and therefore the fund remains at a notable advantage to many of its peers.

View the fund performance data in the following pdfs:

Three Month Cumulative Performance

Six month cumulative performance

One year cumulative Performance

Three years cumulative performance

Sectors-One year

Sectors- Three Years

09/08/2011