“We tend to look for individual buildings and how they are going to perform, rather than taking a sector view,” he explained.
“Eighteen to 12 months ago rents were fairly static, but we are now seeing 3-4% improvements per annum coming through. This is because there has been very little regional supply of new stock over the past seven years, and now the improving UK economy is leading to competition for space between companies that are expanding.
“The M4, Manchester, Edinburgh, Birmingham – all of these areas are seeing growth, and rents could increase by around 22%. Property is not only producing a nice income return, but also capital growth stemming from yield compression.”
So how is Hughes playing the UK commercial property market in his portfolio?
“We have been exposed to commercial property for around 18 months, and have been gradually adding to it over that period,” he said. “Our portfolios are now at full-weight in UK commercial property – around 20% – and it has been a strong driver of performance, yielding 5-6% in 2015 with the potential to go up another 2-3% before year-end.
“The economic recovery has been reflected in the way we have added to our portfolios. We have exposure through three funds: M&G Property Portfolio, which we bought first, is our large, core holding; Standard Life UK Property, which accesses smaller properties and we bought later on; and the Kames Property Income, which we added recently and is smaller still. We are gradually working our way down the property ladder to find the real value.”
