Property as an asset class has had a pretty bad press for the last couple of years. First, we had the fund suspensions due to illiquidity reasons as fund managers were unable to raise enough cash quickly enough to meet redemptions. Then we had the fund suspensions in March 2020 due to the material uncertainty clauses being implemented as valuers were unable to value the properties in the wake of the pandemic lockdown. There have been ongoing challenges to the underlying asset classes, as we have seen structural changes in retail with the move from high street to online, and the changing of the office environment as more of us now work from home. And we now have the FCA long term assets review ongoing which is just adding to the uncertainty of the asset class. But is it now time to reconsider property as an asset class within a multi asset portfolio?
The benefits of real estate as an income producing asset class have always been known – it is a real asset producing an attractive level of income with the potential for a capital kicker. Over the last few years, the income yield produced has been reasonably stable, it is the capital return amount that has been variable. The income payment also grows each year, as rents can either be raised or be set to increase by inflation each year. The income yield also remains attractive to government bonds and investment grade credit. The lack of new supply has also meant that we have seen rental growth as demand increases.
Property also continues to be a lowly correlated asset class against both equities and bonds, so by offering diversification as part of a multi asset portfolio. As the table below demonstrates, the correlation of the UK Direct Property sector remains low against the different equity and bond UT sectors over the last three years (source FE Analytics).
The pandemic has meant there have been structural changes to many property sectors, with office, retail and hospitality being the worst hit. However, there have been other sectors and regions that benefited and are enjoying positive supply and demand characteristics. While there has been a deterioration in retail shopping on the high street, there has been a subsequent increase in online shopping meaning there has been an increase in the demand for logistics and storage space. Where in town shopping centres have seen footfall falling, out of town retail parks have been seeing an increase in volume. Add to these the alternative property areas such as supermarkets, warehouses, care homes, student accommodation and digital infrastructure, there are still plenty of opportunities for property managers to invest in despite the obvious challenges across the sector. Even those more traditional property sectors such as offices are changing so that more flexible office accommodation can be offered, ensuring that they are built fit for purpose by being able to focus on building quality and making sure they meet the latest ESG building regulations, and as such can demand higher rents for those.
Not all real estate is the same, and the challenges being faced has meant that property fund investors have had to adapt. The asset class continues to offer an attractive level of income and offers plenty of diversification against the other main asset classes, typically with a lower level of volatility. So should the investment merits of property as part of a well-diversified portfolio really be up for debate?