Legal and General (L&G) Investments, UK Property Fund – Investment Philosophy
L&G’s overall philosophy rests on a belief that the key to delivering consistent performance is to focus on property selection and active management to maintain a broadly balanced portfolio which is representative of the market as a whole. The fund managers have a research backed asset analysis process for evaluating all opportunities. This sets a required rate of return for each investment, which reflects its unique characteristics. This is a judgmental but structured approach whereby they try to exploit their ability to pick properties and ensure that the expected return adequately reflects the level of risk implicit in the asset.
The Outlook for Property
- In the face of a largely unexpected referendum outcome, the UK now faces a prolonged period of heightened economic and political uncertainty. The range of outcomes is wide and highly dependent on a number of key assumptions and financial variables.
- There is also a high degree of uncertainty over the impact of the referendum on the UK property market over the medium-to-long-term horizons. In the short-term, we expect weaker rates of rental growth and downward pressure on values.
- In spite of this, and, given the sharp decline in government bond yields since the vote, the pricing of commercial property continues to look attractive relative to fixed income assets.
- Barring a severe recession, L&G expect income levels to remain largely resilient. However, weaker tenant demand and rental growth are likely to weigh on the performance of assets with short leases, particularly in more cyclical sectors such as London offices.
- Conversely, long leases to strong tenants should show much more resilience in valuation. Given the sharp fall in risk-free rates such as cash and gilt yields, they may even see upward valuation pressure.
- Geographically, the London office sector is particularly exposed to risks from financial services and multi-national tenants. Retail and leisure assets may prove relatively resilient in the short term, although currency and rising wages provide significant headwinds.
Recent Asset Management Transactions – Adding Value
WALTER HOUSE, LONDON’S WEST END
Ahead of the EU referendum, L&G positioned the Fund with a higher focus on regional areas deemed to be less sensitive to the result. In contrast, they reduced their London office exposure, which they saw as more sensitive to a potential Brexit. This ultimately was proved to be a sensible action.
The recent sale of Walter House near Covent Garden in London was part of that trend. The sale helped build the liquidity position within the fund in the lead-up to the referendum.
The property was bought for £12.8m in 2009 and L&G subsequently acquired the adjacent building, which allowed them to design a comprehensive refurbishment and redevelopment of the site, converting the upper level office space into residential flats. They obtained planning permission to implement the design, but decided that with the planning permission in place and having experienced significant growth since purchase, it was an opportune time to sell the property. They closed the deal with a developer in April 2016 for £29m, £500,000 above the valuation at that point and over double what they purchased it for a few years earlier.
This offers a good example of how L&G capitalise on what was a very strong London office market, capturing profits and repositioning the Fund to the regions, which we believe will be less sensitive to any long term potential Brexit fallout.
Source: LGIM, Lipper as at 30 June 2016.
*Note: Lipper Peers are comparable UK funds that primarily invest directly in UK commercial property assets: median, annualised. Legal & General UK Property Fund shows I class total return net of fees.
An illustration of performance of the L&G UK Property fund against three leading competitor funds that remain open to trading and the ABI UK Direct Property Investment sector. Note that over the five years, the performance with the L&G fund has been steadier with the fund avoiding regular variations over the five years to 05 September 2016. Clearly, the period since the EU Referendum has significantly increase volatility, but the L&G fund has held up relatively well. The fund’s 35.66% growth over 5 years represents an equivalent to 6.29% p.a.
Fund Manager Biographies
Michael Barrie – Fund Director
Michael is a director of LGP with specific responsibility for the Balanced Property Funds portfolio, including the L&G LPI Income Property Fund and the L&G Managed Property Fund. Michael established the authorised L&G Property Unit Trust in February 2006, and has an ongoing responsibility for the L&G UK Property Trust, which was awarded the Money Observer Best UK Property Fund in April 2009 for its performance over three years, and AAA rating by Citywire in 2009 which is still retained to this day.
Michael joined LGP in 2005 having previously been a director of F&C Property Asset Management and lead fund manager for the RSA Life Unitised Fund and RSA Pension Unitised Fund. He also established and managed the ISIS Property Trust and the ISIS Property Trust 2, which were listed on the London Stock Exchange.
Michael holds a degree in land economics, a postgraduate diploma in property investment and is a member of the Royal Institution of Chartered Surveyors (MRICS) and the Association of British Insurers Property Group.
Matt Jarvis – Senior Fund Manager, Property Authorised Investment Fund (PAIF)
Matt joined Legal & General Property as an asset manager in November 2004 and was promoted to co-fund manager of the L&G UK Property Fund. Matt was previously a commercial valuer with Jones Lang LaSalle and was nominated and shortlisted for YN Property Professional of the Year 2014. Matt is a Chartered Surveyor with a Degree in land management from Reading University and a Diploma in property investment from Cambridge University.
Medical Money Management (MMM) operates a series of risk-targeted Investment Portfolios where each portfolio incorporates a number of investment funds, selected after significant research and fund manger interviews. We regularly provide an insight into some of the funds that we are currently using.
MMM would like to thank Legal and General for its assistance in the compilation of this Fund Focus article.
Please note that past performance is no guarantee of future performance and that the value of units held, and any income derived from them, may fall as well as rise. Where a fund holds assets outside of the UK, fluctuations in exchange rates will affect the value of the investment.
This article should not be taken as advice or as a recommendation to invest in the Fund. The Fund is selected by MMM’s Investment Committee as a constituent of a series of risk-targeted portfolios. The Fund has particular characteristics that enable it to blend with other funds within the portfolios. Advice should be sought before investing in the Fund. The Fund may not be suitable for all investors, particularly if held in isolation.