Chris Turner is revered as a property fund manager. Having lived through many a boom and bust, he has not only survived to tell the tale, but is brave enough not to talk up the market when - like now - it is clearly heading in a downward direction. Today, however, he doesn't want to talk about property. He wants to talk about carpets.
"I tell you, somewhere in the banking system, there is a bloody big carpet," he says. I beg your pardon - a carpet? "Yes, a carpet. I know this, because all kinds of things have been swept underneath it."
A clever joke, but one with a serious punchline. Debt is the lifeblood of the property industry, and the constricted availability of finance has turned the whole industry on its head. Shareholders of the UK's largest real-estate investment trusts (Reits) are being besieged with cash calls and, at the smaller end of the scale, Begbies Traynor predicts that over 1,600 private property companies will collapse this year. The reason? The whopping £76bn of property debt that is due to require refinancing by the end of 2010.
"The banks haven't really started to make the writedowns to property they need to," Mr Turner continues. "When that happens, there's going to be an awful lot of real estate to be sold or reorganised. And, at the moment, there's already more real estate to be bought than there are buyers to buy it."
The sage of property
Mr Turner's no-holds-barred views hold much store with financial advisers. "He is the guy who will give the heads up about the right time to get back into property," says one. But when that might be is a tough call.
Certainly, the contrarian merit of property as an asset class is starting to gain credence in investment circles. Commercial property values may have slumped 34 per cent since the market's peak in the summer of 2007, but those brave enough to buy in now benefit from much better yields on a building's annual rental return. The obvious risk is that values will fall further, but, given the turmoil in the equity markets and paltry interest rates, some would argue that it's better to stick your cash into property and wait for the cyclical upturn.
"There is an industry-wide view that the second half of 2009 will be much better for property," Mr Turner divulges. "However, a year ago, they used to say the same thing about the second half of 2008. On which intellectual grounds these theories are based is hard to fathom."
He notes the recent 'vulture' activity from Alternative Investment Market (Aim)-traded opportunity fund London & Stamford, which has been snapping up prime property assets with a cash-rich Middle Eastern partner. The weak pound means that foreign investors get "double the discount" on UK property deals. But for domestic investors who lack this cushion against further falls in value, his advice is to tread carefully.
"The worry for the property market in 2009 is clearly rents," Mr Turner predicts. "I expect rents to drop quite sharply, probably more sharply than we have ever seen before. And with tenant insolvencies on the rise, the cost of holding empty buildings is now quite considerable."
|Chris Turner CV|
|Chris Turner joined Thames River Capital in October 2004 as head of property investment and as the fund manager of TR Property Investment Trust plc (TRPIT). He qualified as a chartered surveyor in 1970, and was a property share analyst and subsequently a director of UK equities with Laing & Cruickshank from 1977 to 1988 and held similar roles with BZW. In 1995 Chris joined Henderson as a director of the investment management division and was appointed the fund manager of TRPIT. In 1999 he was also appointed head of Henderson's Public Property Markets Team.|
It goes without saying that the performance of the fund Mr Turner manages, the listed TR Property Investment Trust, has not escaped the wrath of the market. The value of its shares have fallen 45 per cent in a year - which is a sterling performance compared to some listed property companies we could mention - and Mr Turner has been conducting a major share buy-back programme, which has helped bolster falling net asset values. His fund takes a long-term view, and despite the doom and gloom in today’s market, he firmly believes that property will stage a comeback.
Property will return!
"What will turn people around is the increasing desire to have a chunk of one's portfolio in hard assets," he says. "We're not there yet, but people start to get worried about paper money, and are keen to protect themselves. You can paint a scenario in which by 2010, far from the property market being in its death throes, people will start to think, 'I'd rather buy a property than get half a per cent interest with the bank'. There is a growing desire for tangible, kickable assets."
The love affair with property witnessed on the way up may forever colour some investors' perceptions against bricks and mortar as an asset class - particularly those who invested in property unit trusts. Beset by a wave of redemptions, many high-profile funds managed by major institutions have suspended withdrawals, or imposed queuing systems for investors who are already reeling from substantial drops in the value of their units.
Mr Turner believes the volume of properties such funds tried to dump on the market in the last quarter of 2008 was responsible for the rapid decline in commercial property values witnessed at the time.
"Looking through some of the portfolios we see coming in [from funds trying to sell] you wonder how they ever came by them," he comments. "But money was piling through the door, and the more money they got under management, the bigger their bonuses became."
He defends the investment trust model for being a far more liquid vehicle for investors. "Yes, there will always be a discount. But you don't have to form a queue, and you can get your money out tomorrow."
In the meantime, like the rest of us, Mr Turner continues to watch out for the indications that property is once more featuring on investors' radar screens.
"I went to the Allsops auction a fortnight ago, and it was standing room only," he says. "It just shows you - these are real yield and real cash flow on offer, and the sums are starting to look attractive again."
Just how much more property will end up going under the hammer when the banks start sweeping under their giant carpet remains to be seen.
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