First Property's prospects

The company makes money by running property funds in the UK and Poland on behalf of institutional investors. At the end of September it had £347m of properties under management in six closed-ended funds. It earns fees on those assets, and it earns a further return by investing its own equity alongside that of its clients. The resulting cashflows are both stable and substantial, allowing the group to pay steady dividends while keeping a robust level of cover.

The income of most asset managers is variable, tracking the volatility of the stock market and investors’ sentiment. But First Property has neither problem – properties are much less volatile than stocks, and none of its institutional mandates expire before December 2014. Because the vast majority of its assets are in Poland, which uses the euro for property deals, its reported income in sterling does bounce around. This is annoying for investors, but it has little impact on the health of the business.

Crucially, even if the company’s clients could leave immediately, they probably wouldn’t choose to. That’s because First Property boasts the best track record in Eastern Europe – its Polish funds have topped the performance league tables from benchmark provider IPD for half a decade. Good asset selection and strong property management are behind this. Yet First Property has also excelled at another crucial skill that does not show up in IPD’s statistics – entrepreneurial market timing.

Chief executive Ben Habib, who has led First Property since the turn of the millennium, decided the UK market was overpriced in 2005 and sold almost all its UK properties in 2006-07. Meanwhile he raised money to invest in Poland, where property rents were yielding more than the cost of debt – a significant measure of value in the property world. In February 2010, after the crash, First Property re-entered the UK market, raising money for a new £95m fund to invest in discount retail parks. Hindsight is often cruel to fund managers, but these all look like good decisions.

Mr Habib is now raising money for a second UK fund to buy more discount retail parks, and has ‘indications of interest’ worth about £20m. But he says fund-raising is much tougher than in 2010, when commercial-property values were bouncing and some investors still hoped for a V-shaped recovery.

In Poland, meanwhile, First Property has spent the past 18 months in a state of suspended animation, buying nothing for fear that hard-line German politicians would not back the euro. But as the Teutonic rhetoric has softened, Mr Habib has become more optimistic. "There's greater certainty now. The European Central Bank has stabilised the capital markets, and printing money in the west is undoubtedly good for Poland. We don't think the euro is going to explode."

That means he is raising new funds for a recovery vehicle launched in the autumn of 2010. At the time, investors were unwilling to fish for value in an emerging market, leaving the asset manager to back the project almost entirely with its own equity. But now the fund is up and running, Mr Habib says institutions are more interested. He is currently evaluating roughly £70m of deals. Not all will succeed, but those that do will boost First Property's assets under management, its fee income and dividends.

The Polish property market remains weak – even accounting for the euro's plunge against sterling, property write-downs reduced First Property's assets under management last year. Yet the decline for the six months to September was minimnal, at about 2 per cent, particularly compared with a pre-tax income return of 21 per cent from the group's Polish properties. The country remains economically healthy, with national income growing at about 2.4 per cent in 2012, enough to drive demand for retail and office space.