Kent Pension Fund has made a 15.2 per cent return from its direct property portfolio, less than a year after boosting its overall property holdings to 13 per cent.
Property investment came under fire following the EU referendum vote, with many asset managers gating their funds to prevent too much money leaving, but local authority pension funds in particular have been bullish on the asset class, with the Local Pensions Partnership announcing a £1.2bn property pool in July this year.
If you’re big enough, running a direct account is probably the way to do it
Shaun McWilliam, Kames Capital
Direct commercial property
The Kent fund said that despite negative returns on its UK and global equities, “the fund has again benefitted from very strong returns on its commercial property investments with the direct property portfolio returning 15.2 per cent”.
In June 2015 the fund increased its actual property allocation to 13 per cent from 10 per cent, reducing its private equity and infrastructure holdings to 2 per cent from 5 per cent.
Councillor James Scholes, who chairs the fund, said timing has played a big part in the historic performance of the allocation, which has more than doubled from 5 per cent since early 2000. A previous decision to double the allocation to 10 per cent happened “at the bottom of the market”, he said.
Source: Kent Pension Fund
Another key to maximising returns is allowing the managers freedom to trade, he added. Scholes said the fund had an allocation to manager DTZ which had benefitted from such an approach.
“They have a mandate that allows them to decide and they keep us updated,” he said.
Higher yields outside London
The fund has increasingly been looking at secondary property – high-quality properties that are not in London or south east England and so command a lower price. This shift to secondary property has been taking place across the pensions industry in recent years.
Shaun McWilliam, head of institutional sales for property at asset manager Kames Capital, said high demand for trophy property from foreign investors has increased the attractiveness of secondary property.
“Overseas big investors tend to prefer the trophy assets in London and the south east, but the yields of those have been driven down,” he said. “By investing in places that are less recognisable you can get six, seven, eight per cent [returns].”
Scale is key for property investment
McWilliam added that schemes often look to invest directly in property, but need scale to do so.
“If you’re big enough, running a direct account is probably the way to do it,” he said.
However, he warned that schemes would need about £250m to £300m to invest, and even then they “might miss some parts of the market”.
The question of scale was echoed by Simon Jones, senior investment consultant at consultancy Hymans Robertson.
LPP pools £1.2bn of property amid investor fears over asset class
The Local Pensions Partnership has created a £1.2bn property pool between the London Pensions Fund Authority and Lancashire County Pension Fund as experts have urged schemes not to panic over the recent gating of UK retail property funds.
“There are no hard and fast lines,” he said. However, “it’s perhaps easier for big funds to invest directly than smaller investors”, he added, saying that unless a fund has several hundred million to invest directly, it might be better served by pooled funds.
Riding out the rough patch
Jones added that pension schemes had largely been untroubled by the gating of property funds earlier this year as they held their positions to allow the asset class to recover.
He said: “The gating of funds has been more of an issue for retail than institutional investors. It’s particularly a factor for those who are trying to get money out of property.”
