Key points
A quarter of a century of experience in quoted property 
This new milestone for the Aberdeen Property Share Fund aptly demonstrates how our simple approach to investing has stood the test of time. Since its inception in 1990, the Fund has grown to assets under management of £396.2m (as at 30 Sept 2015). It aims to invest in a quality portfolio of diversified property companies which are largely based in the UK, although we also have the opportunity to invest overseas.
A distinctive approach
The traditional way to invest in property is to do so directly - buying ‘bricks and mortar', but the tried-and-tested format of the Aberdeen Property Share Fund is investment in shares of property companies. Generally speaking, shares can be sold far more easily and with lower transaction costs than physical properties. In addition, investors in the Fund can gain exposure to areas of the market - such as development - that are not always easy to access through direct investment.
Dual diversification
Our well-established investment process offers investors two levels of diversification. The first is generated by the variety of carefully-selected real estate companies held by the Fund and the second by the range of underlying individual properties held by each one. This combination provides far greater diversification than that offered by investing in property directly.
Quality for the long term
The Fund is managed by Aberdeen's Pan-European Equities Team: a robust and well-resourced unit. The team pursues an active, long-term stock-picking approach, favouring well-managed property companies operating in markets with favourable dynamics of supply and demand.
This means we are highly particular when it comes to selecting suitable holdings for the portfolio. Currently, for example, the Fund owns just 18 of the 47 FTSE-listed property companies. As part of this exceptionally thorough approach, we carefully evaluate leverage and development risk to ensure that our holdings have the ability to survive against a tough macroeconomic background.
Knowledge, capability and wisdom
The Aberdeen Property Share Fund is one of several funds managed by the Pan-European equity team, which consists of 16 investment professionals with an average of 13 years' industry experience.
Our investment process is bottom-up and is based on identifying good quality stocks at reasonable prices and then holding them for the long term. We identify such companies from first-hand research, which includes a series of company visits coupled with in-depth analysis of the company. We measure quality by looking at a company's management, business focus, balance sheet and corporate governance. Price is calculated relative to key financial ratios, the market, peer group and business prospects. We believe it is critical to carry out full due diligence on a company before investing and we never invest in a company without first meeting the management.
Key learnings
As the UK's longest standing property share fund, we've learnt a lot from investing over various cycles.
We are fundamentally owners of the businesses we invest in. This is embodied in our long-term buy and hold approach to property investing. Our process of investing in high-quality, well-located assets with a favourable supply/demand balance has consistently been rewarded.
Our flexible investment strategy, allied with an absolute (rather than benchmark driven) approach to portfolio construction allows us to offer a diversified spread of property exposures and to recycle capital away from stronger performers to those out of favour.
We regularly attend company annual general meetings (AGMs) and we look to engage with the chairman and other non-executive directors to maintain a regular dialogue with our holdings. We believe governance structures within property companies, for example strength of management, team structure, incentives and so on are strong determinants of future performance.
Diversification in property investing is critical, as there is often wide divergence between the performance of different property sectors. Having a balanced portfolio invested across various sectors can help reduce risk in challenging times.
Liquidity in property investing has become even more highly prized by investors since the global financial crisis when direct funds were shown to be illiquid. Property equities are therefore now considered more commonly as a mainstream asset/holding as part of a balanced portfolio.
Financial gearing can amplify property returns. Our due diligence process ensures we only invest in companies with an appropriate level and structure of gearing. We are therefore confident these companies can withstand the inevitable tougher market conditions that occur in the sector.
Outlook
At the stock level, we are still finding attractive investment opportunities. The fund participates as an owner in 31 holdings and this multi-manager structure allows us to grow and shrink alongside those companies. Some are returning surplus cash, in particular some of those that have enjoyed bumper returns from the buoyant residential market. But at least as many of our holdings are finding fresh opportunities to deploy capital and have been asking us for growth capital. Recent examples include equity raises by Assura - an investor in healthcare (general practice) properties, Unite Group - the UK's leading student housing company, and Hansteen - an owner of regional industrial buildings across the UK, German and Benelux. In each case, we have been able to deploy capital towards fresh opportunities with attractive prospective returns, and harvest profits from stronger areas.
These have included some of our residential exposed names such as Berkeley Group and Savills, while we have also been top slicing our strong performing owners of London prime and office space such as Great Portland Estates and Derwent London. Unprecedentedly low gilt and bond yields together with London's safe-haven status continue to attractive inward investment pushing up capital values and making prospect returns less attractive. But we also have names owning regional and higher-yielding property assets, often in alternative sectors of the market such as self-storage, student accommodation and healthcare, where prospective returns remain enticing.
While our stock and sub-sector views are continuously evolving, the key precepts of our investment process do not. The property market is cyclical and this places a burden on us as investors to complete careful due diligence not only on the underlying property assets, but also on the management teams, financial and other risks. We carefully evaluate the governance structure to ensure we are only investing client capital with those companies that can weather tough market conditions, and which share our long-term investment horizon.
Reviewing the sector as a whole, valuations are not compelling in absolute terms. Most high-quality property shares are trading at or above Net Asset Value (NAV) and average dividend yields for the sector of approximately two and a half are well below that of the wider equity market. Countering this, however, is that the current environment is very favourable for prospective returns at the company level. A backdrop of very low bond yields and financing costs, together with population and real GDP growth has combined to give growth in commercial and residential property values and growth in rental income for landlords.
Traditionally, property shares have delivered a geared return on the direct market. This makes sense given the financial leverage (now modest in most cases) and development activity undertaken by listed property companies. In common with other equities, they typically look forward and discount future expectations. In this case, there is a clear pattern of the property share market turning (for better or worse) six-to-nine months ahead of the direct market. There is no reason to think that these characteristics will cease to apply over the next cycle.
In conclusion, investor returns are likely to be more modest then they have been going forward, but still positive for long-term investors. For investors looking for liquid and diversified exposure principally to the UK property market, the Aberdeen Property Share Fund has much to offer.
Please remember the risks;
- The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested.
- The Fund invests in a specialist sector and it will not perform in line with funds that have a broader investment policy.
- The Fund invests in a relatively small number of investments which can potentially increase volatility relative to funds with larger numbers of investments.
- A full list of the risks applicable to this Fund can be found in the Prospectus which is available at www.aberdeen-asset.co.uk or upon request.
Contact us
For more information please visit our website at www.aberdeen-asset.co.uk/propertyshare or contact our Sales Support Team, 020 7463 3887
Important information
For professional investors and financial advisers only - not for use by retail investors.
The Fund is a sub-fund of Aberdeen Investment Funds ICVC, an authorised open-ended investment company (OEIC). The Authorised Corporate Director is Aberdeen Fund Managers Limited. Nothing herein constitutes investment, legal, tax or other advice and is not to be relied upon in making an investment or other decision. No recommendation is made, positive or otherwise, regarding individual securities mentioned. This is not an invitation to subscribe for shares in the Fund and is by way of information only. Subscriptions will only be received and shares issued on the basis of the current Prospectus, relevant Key Investor Information Document (KIID) and Supplementary Information Document (SID) for the Fund. These can be obtained free of charge from Aberdeen Fund Managers Limited, PO Box 9029, Chelmsford, CM99 2WJ. Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
