A challenging macroeconomic environment means investors are reassessing portfolios. We look at how long income property assets offer inflation linkage without compromising on growth potential.

 

The UK CPI inflation rate reached 10.1% in August, far outstripping the Bank of England’s target of 2%[1], and forecasts suggest prices will continue to rise.

Escalating energy bills in the wake of Russia’s invasion of Ukraine, higher costs for imported goods following Brexit and the supply pressures caused by the COVID-19 pandemic see inflation predicted to climb to as high as 18.6% by the autumn[2].

In response, the UK’s central bank has increased the interest rate to 1.75%[3] hoping people will borrow less and save more, but it also concedes the UK economy will likely shrink by 2% over the next five quarters.

This challenging macroeconomic environment clearly has implications for investors, and advisers are being challenged to ensure portfolios are shielded against rising interest and inflation rates today and in the future.

During the first half of the year, total UK commercial property transactions reached almost £33 billion, but this has slowed as the interest rates have started to bite. Preliminary figures for August of £2 billion are the weakest the month has seen since 2020 and have fallen from a monthly average of £5.4 billion during the first six months of 2022[4].

Investors, nervy about the impact of soaring inflation, are seeking reassurance that there are opportunities in commercial property that offer a degree of insulation during a potential recession.

On the defence

Long income property funds invest in properties that are let on long-dated, typically inflation-linked leases for between 15 -200 years.

Portfolios are comprised of carefully selected diverse and highly sought-after assets occupied by high quality tenants in defensive sectors whose operations do not necessarily correlate to the wider economy.

Some of these property sectors can also offer some benefits to society, such as providing care or affordable housing, which align with investors’ social investment goals.

For example, TIME:Property Long Income & Growth is an open-ended hybrid real estate fund that blends listed real estate securities with direct long income UK property.

The Fund invests across 12 sustainable sectors including social housing; care homes; student accommodation; healthcare and data centres. By screening out companies and sectors deemed less economically sustainable, such as high street retail and high-risk securities with low market capitalisation, the fund targets reduced volatility and greater certainty of income.

Best of both worlds

Including real assets which benefit from long leases and focus on sectors deemed more sustainable in the long term, gives TIME:Property Long Income & Growth several advantages.

First, it offers lower volatility than a portfolio of just REITs through its exposure to direct long income property assets, because long leases limit uncertainty around factors such as impending lease expiry and rent reviews.

Second, long leases are typically linked to inflation providing visibility and security of income.

Third, the Fund provides better liquidity than a portfolio of direct property as listed real estate securities can be traded daily.

A brighter horizon

In September 2021, TIME:Property Long Income & Growth acquired a Bright Horizons children’s nursery in Hertfordshire for £2.5 million.

The deal offers precisely the inflation linkage and long-term growth characteristics investors seek in the current economic environment.

The company is one of the largest providers of early years care in the UK and, while supporting the 30-hours funded childcare for all eligible families, provides a safe environment for children to learn and develop.

The company has a high credit rating, and the nursery sector offers strong growth potential.

Meanwhile, Hertford is in a strategic location in London’s commuter belt and offers favourable economic and demographic surroundings.

The lease extends for 25 years and has a net initial yield of 5% per year. The contract includes five yearly RPI rent reviews, annually compounded with a floor of 1% and cap of 3%.

Promising pipeline

There is no shortage of attractive opportunities that meet TIME:Property Long Income & Growth’s strict investment criteria.

Many of the sectors in focus have increased demand dynamics, often being driven by population, demographic or structural changes and the need for the supply of properties to meet these demands remains.

This ensures the Fund can continue to do what it has always done; invest in economically sustainable sectors that provide inflation linkage while offering long-term growth potential.

 

Important information: This is a financial promotion as set out in the Financial Services and Markets Act 2000 (FSMA). This document is issued in the UK by TIME Investments, a trading name of Alpha Real Property Investment Advisers LLP, which is the Investment Manager of the Fund with delegated authority from Alpha Real Capital LLP, the authorised corporate director of the Fund. Both TIME Investments and Alpha Real Capital LLP are authorised and regulated by the Financial Conduct Authority. Please note investors’ capital is at risk and there is no guarantee that the Fund’s investment objective will be achieved. The value of investments and the income from them may fall as well as rise as a result of fluctuations in market, currency or other factors and investors may not get back the original amount invested. Any past performance data cited is not a reliable indicator of future results. TIME Investments may source data from third party data providers but accepts no responsibility or liability for the accuracy of third party data. This document does not constitute investment advice and potential investors are recommended to seek professional advice before investing. Applications for shares in the Fund can only be made via an Application Form and after reviewing the Key Investor Information Document (“KIID”) and the Prospectus and investors should carefully read the risk warnings contained within. All documentation is available on request. Specific Fund Information: Achieving the Fund’s investment objective will depend on a wide range of factors relating to the wider economy, regulations or specifically to infrastructure and renewable energy, property companies and bonds into which the Fund invests. There may be limited diversification across sectors and assets. In addition the value of any investment in equity markets is volatile and the Fund’s share price may be volatile due to movements in the prices of the underlying equity and fixed interest security holdings. Fund Status: The Fund is a sub-fund of ARC TIME:Funds II and is a Non-UCITS Retail Scheme within the meaning of the rules contained in the Collective Investment Schemes Sourcebook (the “FCA Regulations”) published by the FCA as part of their Handbook of rules made under the FSMA. Issued: September 2022

[1] https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising

[2] https://www.bloomberg.com/news/articles/2022-08-22/citigroup-says-natural-gas-crisis-will-drive-uk-inflation-to-18

[3] https://www.bankofengland.co.uk/knowledgebank/why-are-interest-rates-in-the-uk-going-up

[4] https://www.colliers.com/en-gb/research/uk-property-snapshot-august-2022

Posted: 02/09/2022 Categories: News

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