2015 Returns: Cloned panellists, volatility, sustainability and “dull and boring”.

26 February 2016

Yesterday morning I was privileged to Chair the AREF/IPD Quarterly UK Property Fund Index results for the twelve months to December 2015.

Up on stage with me were Helene Demay (MSCI), Alistair Dryer (Aviva) and Paul Tebbit (Blackrock), all of whom provided some interesting insights and views on the drivers of performance and prospects for the year ahead; albeit I did think it a little unfair when someone commented that the three male panellists were so similar in appearance as to have been cloned!

Not surprisingly, performance in 2015 was very much driven by offices and industrial, with retail (apart from Central London) very much bringing up the rear. I have to say, as a House, KFIM had expected retail warehouses to perform well last year, as did both Paul and Alistair – does this suggest that the sector provides the opportunity for built up latent value? In terms of investment returns (both short and long term), the Specialist Funds tended to reside in the first and fourth quartiles, at face value suggesting that they are a bit of an all or nothing bet. However, these extremes probably reflect the use of debt – those that do well, do very well, and those that do badly, do particularly badly.

Another interesting discussion revolved around the relative volatility of the different international markets. It was no great surprise that the data showed that the UK is the most volatile market, with Germany being the least volatile (for those of you that are unaware of this phenomenon, the words “mark to market” would be worth exploring). However, what did surprise me, and what intuitively contradicts the notion of the UK being the most volatile,  was that the UK actually has less debt than virtually any other market. Helene’s view to this is that it reflects the transparency of the UK, particularly the ease of access to data and therefore the ability for the valuers to react quickly to changes in market conditions; in my opinion a real positive in terms of attracting overseas capital, albeit perhaps a negative under a traditional asset allocation model due to the perceived higher volatility.

As a final observation, the general consensus was that recent returns are not sustainable and that investors need to adjust their future return expectations, with one of the panellists commenting that it would be quite nice to have a more “dull and boring” returns environment – a sentiment which I probably agree with!

All in, an interesting morning.

Kevin Aitchison

The headline figures were as follows:

All Property 12%
Specialist Funds 12.9%
Balanced Funds 12.5%
Long Income Funds 8.1%

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