Mark Dampier: Time for a fresh look at property

The Analyst
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The Independent Online

Constructing a portfolio with the right mix of investments is important for all investors, but every now and then I meet an individual or team I would consider backing whatever I felt about the asset class they operate in. One such example is the team at Thames River under the wise head of Chris Turner. Most of you won't know who Chris Turner is, but in my view he is the Neil Woodford of the property fund world.

Regular readers will know I have not been a great fan of property, either residential or commercial, for some time. That said I did feel we had pretty much reached the bottom of the market last year and since then sentiment has undoubtedly improved, so I do think it is worth considering. I'm sure I don't need to remind you though that physical commercial property fell approximately 40 per cent prior to this – as bad as many equity markets!

While Chris Turner isn't managing this new fund directly he oversees a team of 10 that do, headed by Marcus Phayre-Mudge and James Wilkinson. Both joined Thames River in October 2004 from Henderson as part of Chris's team then running the TR Property Investment Trust. This new fund will be an "equity long/short" strategy, which means it will seek to capture at least 100 per cent of bull market returns in listed UK and European property shares and try to protect against much of the downside in a bear market. Too good to be true, I hear you say! Well, there are no guarantees, but the same team have been managing a hedge fund on a similar basis, which over the last two years has made money over one of the most difficult periods in the property market.

The team's investment process seeks to analyse the wider economic picture by taking a view of the physical property market and carefully comparing this with the market consensus, which can often be wrong. After this evaluation, their stock selection is based on company analysis combined with a detailed knowledge and understanding of the UK and European property markets. The team also manage some £70m of office retail and industrial property in the UK, which gives them a good insight. The fund will produce some dividend income expected to be in the region of 2.5 per cent, though there is no particular target and the level will be lower if the team are less confident about the market and feel it is worth building in more downside protection. The team aren't overly bullish at present, but they feel there is some decent potential in some areas. They believe the larger property companies trade at a significant premium to their stated net asset values (the value of the company's assets minus liabilities) but these figures are likely to be significantly understated given the recent change in sentiment. Yields are also relatively attractive even though the recent bounce in values has meant they have been reduced. Nonetheless, property shares still offer 4.5 per cent to 5 per cent per annum in dividend terms, which are broadly speaking well covered by rental income.

The main reason for not being very bullish on the commercial property market is that debt levels remain far too high. The team like to give the example of Lloyds' book being at an average loan to value of 90 per cent and suggest they will wish to reduce this to around 60 per cent. This means that Lloyds (and others) are likely to be natural sellers for quite some time; not an insurmountable problem but it could well hold the market back for a while.

The only real drawback I can see in the fund is the quarterly performance fee. Funds should not be calculating performance fees over periods of any less than one year, and they should really defer taking them for at least three years. Having said that, this is a good-quality team and it is well worth a look, especially given the downside protection they are aiming to build in.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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