A co-conspirator recently shared with us an update from all-powerful risk ratings provider Dynamic Planner.
The bit which caugt our eye was Dynamic Planner's decision to remove any allocation to property from their risk models.
In their latest update to clients they wrote: “Property as an asset class has faced difficulties since the Brexit vote in 2016, compounded by the pandemic. Most of the property funds with daily liquidity were severely affected by redemptions, resulting in gating of these vehicles. As many clients were unable to redeem their investments, we retained property as an asset class within the benchmark allocations.
"With these issues recently resolved, the investment solutions in the property space have been closed, as a result of what happened, liquid property is not really an investable asset class anymore, enabling us to remove the allocation. This change also improves the liquidity of the overall benchmark allocations.”
Instead Dynamic Planner has added infrastructure to the allocations, commenting that: “Globally, governments, supranational organisations and companies have identified a growing infrastructure investment gap. In the UK, the government has also identified infrastructure as an avoidable path to sustainable growth for the economy.
"As an asset class, infrastructure has numerous desirable characteristics, including stable cashflows linked to inflation and low correlation to broader markets. The asset class also provides exposure to attractive long-term themes, offering exposure not only to traditional infrastructure such as transportation but also evolving areas such as clean energy and digital infrastructure. While most infrastructure investment is through private markets, more liquid exposure can be gained through listed infrastructure: listed companies that invest in, build and operate infrastructure assets.”
Our database indicates the combined allocation to property and infrastructure has fallen from 5.2 per cent to 3.2 per cent over the past year.
However property still makes up the bulk of this at 2.1 per cent and infrastructure at 1.1 per cent.
Ben Yearsley, director at Fairview Consulting, said he was surprised Dynamic Planner had not opted to introduce real estate investment trusts into the portfolios, instead of scrapping the allocation entirely.
Peter Dalgleish, chief investment officer at Parmenion, said the difficulties for property stemmed from the fact that it is now largely only accessible via Reits or investment trusts.
And this is certainly reflected in our database, where the most popular property funds which don't invest directly in property itself but in property equities - for example L&G Global Real Estate Dividend Index, Schroder Global Cities Real Estate and iShares Environment & Low Carbon Tilt Real Estate.
So of course some might argue these funds are closer to thematic equity products than actual property funds.
Dalgleish said: “The risk-adjusted returns of property remain appealing within a diversified multi-asset portfolio due to its uncorrelated returns versus fixed interest and equities. The underpinnings of that are predominantly due to the relative attractiveness, stability and visibility of real income generation given most rental contracts incorporate inflation protection within them.
"The challenge now though for investors is that accessing property is now largely confined to Reits or investment trusts, which are effectively equity-like instruments and therefore the diversification benefits have been diluted. Given how unloved property has become leading to depressed valuations, combined with easing interest rates making their yields increasingly attractive, it is unsurprising the asset class is gaining investor interest.
"Furthermore, with a slowdown in global growth leading to an easing in the labour market, job security is on the wane leading to increased office occupancy rates as more people return to the office. The asset class is not without its challenges, but within a multi asset portfolio it remains a useful source of diversification, assuming you can access it via a structure that doesn’t correlate too highly with equities."
