Investment Performance of Niche Property Investments

Again, it is difficult to define the investment performance of the property sector as a whole within the context of this document, due to the wide variety of sub-sectors and regions which must be considered. In the UK for example, residential real estate has delivered markedly different performance for each Investor that has participated depending on their strategy (buy to let/distressed assets/development etc), and residential property as a whole has delivered a different performance to commercial property or student accommodation. The same can be said for every combination of sector, strategy and region, therefore the context of this document does not allow for a detailed analysis of the investment performance of the sector as a whole.

Residential – The UK market offers some interesting opportunities, as depressed prices combine with a lack of buyer financing to create a viable rental market that can deliver yields of between 4% and 8% after costs. In other more distressed markets, properties can be acquired with heavy discounts, and rental yields can reach as high as 15% to 20%, although in many cases the quality (and therefore ability to dispose of) such property assets can be questionable, and Investors in these markets might better take advantage of current market dynamics by acquiring properties to refurbish and resell very quickly, capturing the discount as a capital profit and eliminating the long-term liability. Emerging markets also offer opportunities to invest in residential property, and the upside capital growth potential is often attractive, although the location risk associated with acquiring and owning physical property in many countries can be significant. Again, the cash-flow dynamics of direct investments in real estate are often very different from those of securitized investments such as property funds.

Commercial- Office space, shopping centres and industrial space have long been the focus of large Institutional Investors seeking stable income and long-term growth prospects. In developed markets where infrastructure is well established, commercial property is viewed as a stable income investment with some growth potential, and in less developed markets potential for growth is higher but so too is the level of risk to capital in terms of location and counterparty risk. The investment performance of commercial property varies from region to region, and across the varying sub-sectors such as office or industrial. One good point of reference for the global performance of commercial property investments is the FTSE UK Commercial Property Indices series encompassing the Retail, Office and industrial Indices; the All Property Index delivered 1.88% in the 12 months to March 2012.

Student accommodation – This is a growing sector, driven by demand for reasonable accommodation from University students; as the global population grows, so too will the volume of students attending University who will in turn require suitable accommodation in close proximity to their campus. Investors can purchase units in student blocks, effectively becoming the landlord of the unit themselves, or more often than not entering into an agreement with a management company who will manage the property on their behalf. Direct property investments in the UK student accommodation sector have delivered yields upwards of 10% p.a. There are also a number of funds investing in student accommodation which tend to acquire whole blocks, which investors taking a stake in the fund. The Brandeaux Student Accommodation Fund has delivered an average annual yield of 9.71% p.a., and the Mansion Student Accommodation Sterling Fund delivered an annual performance of 12.14% in 2011.

Care homes – Another niche sector that is gaining popularity amongst both institutional and private Investors is care homes, as both seek to correlate the performance of their investments with trends in socio-economic fundamentals such as an ageing global population, and capture financial gains from increasing demand for assisted living accommodation. Investors may purchase units within custom care accommodation and assign day to day management to an operator, or they may choose to invest in a fund specialising in such assets. Direct investments in care homes offer the potential for capital growth and in many cases a “guaranteed” rental income of around 8% p.a., although most opportunities for private Investors tend to be pre-construction projects, adding significant counterparty and strategy risk. Access to investment funds specialising in care homes is severely limited for retail investors, and therefore there is no credible performance data.