Revealed: The best way to get income from property in 2017 Revealed: The best way to get income from property in 2017

Mark McKenzie, senior portfolio manager at Thomas Miller Investments, writes for What Investment about the best way to get income from property in 2017

How to profit from property

Sullivan sees profit in several UK propertyshares

Despite the turmoil following the Brexit vote in June 2016, it has proved to be a fairly buoyant period for property markets. The post Brexit uncertainty initially made occupiers more cautious leading to a slowdown in both volumes and rental growth. However, this reversed somewhat over the fourth quarter, preventing vacancy rates from rising markedly.

The income return component looks to remain the driving factor for total property returns in 2017. Market projections indicate modest improvement in rental growth across the majority of property sectors and overall, property fundamentals remain supportive. It is a two-tiered market with central London trading significantly ahead of the pre-financial crisis peak in contrast to regional markets. While the influx of foreign capital bolstering London prices has been supported by Sterling’s depreciation, we feel there is better value in regional and more specialised property markets.

Read more: Top investor reveals UK property shares he’s bought since Brexit 

In traditional markets we feel Brexit related uncertainty will likely lead to a weakening in demand for office space in London. In contrast, many of the regional city office markets are likely to break new records for annual take-up. The industrial and logistics property market was an outperformer in 2016 and we expect this to continue. While the sector will not be immune from uncertainty surrounding the trade impact of Brexit, lack of supply creates strong price support. Retail property may face a more challenging environment as labour costs and Brexit worries weigh on sentiment. The impact of online retailing will also continue to drive structural change in the market.

From an alternative market perspective we favour student property, Healthcare and social housing. The student property market is supported by significant supply/ demand imbalances and the UK’s position as one of the leading centres of higher education. The healthcare sector continues to attract significant interest and our aging population should make this an enduring trend, and is well placed to weather any economic downturn. There is an equally strong story in the social housing market where lack of supply is well documented and all major political parties have indicated the provision of more housing is a priority. This fundamental imbalance should mean demand remains high.

In terms of property exposure, we have a preference for allocating via closed ended funds {investment trusts}. We feel the closed ended structure has a number of benefits over the open-ended structure due to the permanent capital nature of the investment vehicle. In particular, not having to carry a liquidity buffer to satisfy investor flows and therefore gaining purer exposure to the asset class is of significant benefit. The cash drag this can impose on performance can materially detract from long term returns.

Interestingly the Financial Conduct Authority has recently released a discussion paper on illiquid assets and open-ended investment funds. The paper considers the risks created using open-ended investment funds to gain exposure to assets that may be difficult for the manager to buy, sell, or value quickly. As was experienced following the Brexit vote in June, some open-ended property funds had to close to redemptions due to withdrawals exceeding both redemptions and liquid assets held within the funds. Clearly this is not a desirable outcome for investors who were supposedly invested in funds offering daily liquidity. This ultimately served to highlight the inherent liquidity mismatch embedded within this structure.

We think that while there may be some headwinds to certain sectors of the UK property market due to potentially protracted Brexit negotiations, certain sectors will continue to be well supported, and a bias towards more regional markets is warranted.

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