Henderson UK Property: Fund that is choosy about its business tenants to deliver less risky returns

By SALLY HAMILTON, FINANCIAL MAIL ON SUNDAY

Updated: 06:47 EST, 30 June 2014

Commercial property funds are an attractive haven for income seekers as demand for office and industrial space by businesses rises in response to the recovering economy.

But it is not just decent rental yields that investors have enjoyed from holding commercial property. They have also benefited from rising prices.

Funds that have focused on owning bricks and mortar in London and the South East have performed best. One that has exposure to the South East is Henderson UK Property.

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Over the past year it has generated an overall return of 10 per cent – less than that from the FTSE All-Share but far more than from a cash deposit.

Acting co-manager Andrew Friend says one of the strengths of the fund, which has more than doubled in value to £1.9 billion since January 2013, is that over  99 per cent of its properties are bringing in rent. This is achieved by being choosy not only about a property but also its tenants.  

He says: ‘We look under the skin of the tenancy, examining its length and the customer quality.’

He says the popularity of property is its role as ‘a proxy for fixed income’. The fund prefers lengthy leases, sometimes as long as 25 years, to give it long-term predictability and these can be found with supermarkets, hotels, and private healthcare facilities.

Apart from London and the South East, there are a few other location gems, including Cambridge, where 4 per cent of the fund is invested in Capital Park, an office estate that will be home to drugs giant AstraZeneca’s new global headquarters.

The fund also hopes to refresh the parts that other property funds can’t reach with a sizeable investment in a new distribution centre for Heineken in Derby. The team is attracted by the beer maker’s signing of a 15-year lease with a get-out clause after ten years. Friend says: ‘That’s ten years’ guaranteed income.’

Juliet Schooling Latter, head of research at fund broker Chelsea Financial Services, likes the fund.  She says: ‘The managers’ primary concern of maintaining an attractive yield, now 3.7 per cent, sets this fund apart.’ She approves of its strategy looking for tenants likely to survive all stages of the business cycle and likes the fact the average lease length is more than ten years, with 25 per cent of the leases set up so that rents rise in line with inflation.