The BMO UK Property fund is set to reopen on Monday after the managers raised the cash level by offloading assets in the office, retail and retail warehousing sectors, while moving into industrial property and logistics.
In a update published on the asset manager’s website, managers Guy Glover and Emma Gulliver said they have been raising liquidity levels through “carefully targeted sales” to ensure suitable cash weighting throughout the reopening.
“Given the ongoing uncertainty in the property market, with headwinds from the Covid-19 pandemic and Brexit, we have taken the decision to bring a number of assets to the market to ensure that the target liquidity can be achieved,” they said.
BMO UK Property suspended in March, along with a raft of others funds, because the independent valuers were unable to put a price on the underlying assets as a result of coronavirus-related market volatility. In September, the Royal Institution of Chartered Surveyors announced a general lifting of valuation uncertainty for all real estate assets, but some funds, including BMO’s, remained closed.
According to the latest factsheet, dated 31 October, the BMO UK Property fund has a 25.7% weighting in cash. Portfolio Adviser asked BMO Gam for an up-to-date cash position.
Industrials and logistics to become over 50% of the portfolio
The managers outlined in the note how the portfolio might change after the targeted property sales are completed, including exposing more than half the portfolio to industrial property and retail assets while reducing office exposure.
The managers said: “We are particularly aware of the potential for a downturn in overall demand for office space in the medium term, as businesses adapt to changing working practices and an increased preference for flexible and home working, which could have a significant impact on rental prospects in markets with an over-supply.”
When the fund reopens, exposure to office space is expected to be 21.3%, down from 28.3% in October, while industrials and logistics is set to represent 55.3% of the portfolio, up from 41.8% in October. This is well ahead of the average peer group weighting to the sector of about 30%.
They added: “We have taken the conscious decision to reposition the portfolio towards the industrial and logistics sector as we believe the demand drivers for these types of assets remain very strong, and against a backdrop of historic under-supply, this sector is forecast to deliver significant outperformance over the next five years.”
The managers said over the next five years, all forecasters are predicting positive returns from UK property, boosted by an attractive yield gap over gilts and fixed income, and a low correlation to more volatile asset classes.
“Industrials and logistics are forecast to deliver the highest returns, backed by the continued increase in online spending and the prospect of some onshoring in manufacturing post Brexit, they said. “In contrast, shopping centres and high street retail remain challenged, as the impact of the Covid-19 pandemic is likely to have accelerated the structural issues already facing these sectors.”
