Jenny Lowe reveals how one fund manager is hoping to uncover an abundance of property opportunities in the future – and he’s not doing too badly in the present.

Here’s some good news that might have passed you by – there is growing evidence of a solid revival in the UK commercial property market, with single-digit positive returns now anticipated for 2010. The property derivative market, often a useful indicator for the direct property market, even suggests that the total return on property next year could reach around 8 per cent.

One man who is keen to capitalise on this market is George Shaw, the wily manager of the Ignis UK Property Fund. Having graduated from Heriot-Watt University in 1990 with a BSc in estate management, Shaw has risen through the ranks from being a surveyor at Weatherall Green & Smith to associate director at Lambert Smith Hampton and then to property investment manager at Abbey National Asset Management. He joined Ignis Asset Management’s property team in 2005, where he is supported by a ten-strong team with an average of 14 years’ experience in the sector.

Buying bricks and mortar
The fund invests in a balanced portfolio of commercial property across the retail, office and industrial sectors, and can invest in other smaller sectors, including leisure.

Shaw’s focus is on those properties with good covenant strength (i.e. reputable tenants who pay their rent regularly) to ensure a steady income stream. ‘Income enhancement and retention will remain very much towards the top of the agenda, which we’ll aim to achieve through proactive asset management,’ says Shaw. ‘This includes managing our current leases or negotiating with our tenants to renew or re-gear, all with the objective of sustaining and increasing the income stream from our assets.’

Property often proves to be a popular solution to the challenge of diversification. That said, such investments require experience and a detailed understanding of the influences and issues that drive the sector. Shaw explains, ‘Many property funds just offer exposure to shares in property companies. But most investors seek exposure to direct property in order to diversify their portfolio. Therefore, we invest in genuine “bricks and mortar”. Ignis has the advantage of a strong and well-resourced team that is dedicated to actively searching out value.’

Economic input
The key issue for the UK property market, according to Shaw, remains rental growth. At its fundamental level, rental growth is a function of economic growth: ‘With unemployment rising and taxation on the increase, downward pressure on rent is likely to continue for at least the next 12 months, with offices and bulky goods retail warehousing likely to remain the most vulnerable sectors.’

But Shaw believes that the fund is now in a position, as the market improves, to actively seek attractive opportunities: ‘We will be looking across all sectors. The driving force will be for quality properties with long-term tenants, rather than just those that are deemed to be cheap. We want assets offering strong property fundamentals and relatively secure income.’

To illustrate his point he highlights the Masthead Industrial Estate in Dartford: ‘This property is a modern multi-let industrial/ warehouse estate with tenants that include Colorcon, Vodafone and Kuehne & Nagel. It is ideally located at the entrance of Crossways Business Park, which has been developed into one of the largest and most successful business parks in southern England, accommodating major office, manufacturing and warehouse users, with the renowned Bluewater Shopping Centre nearby.’

The only way is up
An added benefit of property investment is that the rental income stream can be actively managed. ‘Rent reviews in our leases are upwards-only, so once the rent has been struck, the income is relatively secure and has the opportunity to rise,’ explains Shaw. ‘We have been working with tenants and external consultants to secure lease renewals, achieve successful rent reviews and minimise vacancies.’

According to Shaw, proactive asset management is a vital component of maintaining and improving an income stream from a commercial property portfolio: ‘This can include not only renegotiation of leases before they naturally expire, but also offering to refurbish or otherwise improve an asset in partnership with an existing tenant.’

He cites the recently redeveloped retail and office property Stock Exchange House in Glasgow as a prime example. It is situated on Buchanan Street, which has become the City’s prime shopping street and is a magnet for both domestic and international retailers, with tenants including Urban Outfitters, The North Face and Subway.

Unpredictable times ahead
Despite the general improvement in the commercial property space, Shaw is concerned about the possibility of a ‘double-dip’: ‘Consensus economic growth forecasts for 2010 are currently at 1.1 per cent, with upwards revisions continuing to be made. However, any recovery is likely to be muted given the high level of both public sector and consumer debt.’

Opinion has been divided on whether the worst threat to the economy is inflation, caused by significant expansion of the monetary base, or deflation, caused by the fall in demand. But with the Monetary Policy Committee opting to stimulate the UK economy through quantitative easing, inflation is likely sooner or later.

‘It is generally acknowledged that quantitative easing is likely to trigger inflation over the medium term,’ says Shaw. ‘Tangible assets will, therefore, be particularly important going forward and income will be the key component of returns as investors seek to hedge against this risk.

‘Portfolios with a high, stable and secure income stream are likely to outperform over the next two to three years, which is a benefit that commercial property as an asset class can offer.

‘There are signs of interest for better-quality stocks, and yields for certain tiers of prime stock appear to be stabilising,’ he adds. ‘But further rises in all property yields remain likely in the short term.’

Keeping his powder dry
Of late, the Ignis Property Fund has not opted to increase its holdings. Shaw points out that, ‘We have not made any capital transactions over the past six months so we have retained our core assets and managed the income from them.’

But this by no means suggests that Shaw and his team are not planning to find new ventures going forwards. Shaw concludes, ‘There are good opportunities in the property market, with yields looking historically attractive. Given good medium-term prospects, and having built a prudent cash reserve, we are keeping our eyes open for opportune purchases and sales, with positive returns possible from 2010 onwards.’