Long income property in the UK increases out-performance over the mainstream market
Long income sector has a history of offering resilience during market stress
In the 12 months to March 2020, the CBRE Long Income Index delivered a total return of 6.3%, comfortably ahead of the total return produced by the “mainstream” commercial property market in the same period, as represented by the CBRE UK Monthly Index, of -0.5%. Long Income performance was driven by capital growth of 1.7% and income return of 4.4%.
The CBRE Long Income Index – the only index that tracks the performance of assets held by specialist long income funds – reports data quarterly but quotes figures on a rolling 12 month basis. The March 2020 figure therefore represents a period (beginning in April 2019) encompassing 11.5 months of benign to weak mainstream market backdrop – the steady performance of office and industrials but slow decline of retail – finishing with two weeks of Covid-19 related uncertainty. Nevertheless, the data points to the resilience of the long income sector in the face of market stress, as the decline in 12 month returns for the years to March 2019 and 2020 respectively was much gentler on the Long Income Index, at 8.1% to 6.3%, than the Monthly Index, at 4.7% to -0.5%.
The CBRE Long Income Index divides assets into three categories based on the structure of the investment, as this is a far greater determinant of performance than say the broad sector of the asset. Across these different structures varying patterns of performance played out over the 12 months to March 2020.
- Income Strips performed strongest, delivering a total return of 8.3% thanks to capital growth of 4.4%.
- Ground Rents saw total return of 6.4% off the back of capital growth of 3.3%.
- Sale & Lease Backs were the weakest for the fifth quarter in a row, but total returns of 5.6% matched the best performing sector (Industrials) on the Monthly Index.
On the pricing side, the year to March 2020 saw long income yields inch in, declining by -3bps. This of course compares favourably to the mainstream market, where yields have risen by 33bps. The fall was not uniform; Sale & Leasebacks saw a +5bps increase in net initial yields, while Income Strips and Ground Rents saw declines of -13bps and -4bps respectively.
The Internal Rate of Return (IRR), a key benchmark by which investors assess opportunities in the long income market has declined over the last twelve months as competition for scarce supply of investment product has been intense and inflation expectations have weakened. At the Index level Long Income IRRs decreased by -61bps in the year to March 2020; those on Sale & Lease Backs fells -55bps, with Income Strips moving -63bps and Ground Rents -75bps.
These results cover only a very short period of market disruption caused by Covid-19, and the impact of unprecedented policy response and economic shutdown will likely be seen more in next quarter’s figures. However, this initial glimpse at comparative data between long income and mainstream property shows that long income, while not immune to market stress, has once again offered investors greater protection in times of turmoil.