In a climate of low returns, property can be a good investment for a sustainable income stream.
Charities rely on income from their investments to fund grant giving and for other beneficial uses. One of the challenges in managing a portfolio of investments is to ensure a robust and sustainable income stream, particularly in the current economic climate of low returns. As such, property can play an important role in fulfilling these objectives and in recent months, investment managers have seen the benefits of an increased weighting to the asset class within the wider investment portfolio.
Limiting property rental vacancies is key. To achieve this, it is important to take a pro-active, ‘front foot’ approach to occupier liaison and to develop close relationships with your tenants. This is crucial when approaching critical lease dates such as rent reviews, break options and expiries. Early engagement with the tenants in your portfolio will increase the chances of securing future income and reduce the risk of losing it.
Each lease event is also an opportunity to add value by growing income through rental increases. At rent review, typically every five years, this growth might come from a fixed rental increase written into the lease, a rent linked to the growth of an index (such as the RPI or CPI) or by successfully arguing that the rent is below the prevailing market tone.
Alongside this, maintaining a rigorous approach to individual stock selection within the portfolio will ensure that any lost income is more easily replaced. Each asset in the portfolio should demonstrate the core fundamentals of location, building quality and income security. In the event of a vacancy, the period of rental void is significantly reduced with a high quality, well located building where there is plenty of underlying occupier demand.
Diversifying income across the property sector, geographical region and tenant type will ensure that risk to your portfolio’s income profile is further minimised. Maintaining a spread of lease expiry and tenant break option dates across your portfolio will avoid a ‘bunching’ of lease events in any one year, and will therefore remove the chance of a sudden reduction in income.
Finally, the quality and security of income in the portfolio should be regularly reviewed to ensure that your tenants remain financially robust and capable of meeting the rent demands. Persistent late paying or a request to pay more frequently is a sign of potential tenant default.
Achieving superior total returns
Whilst safe-guarding your portfolio income is paramount, so too is protecting and enhancing your capital through opportunistic asset management. This can take the form of physical improvements to the building or legal improvements to the lease or tenure, for example, to add value.
Prudent stock selection, active asset management and maintaining a defensive, high quality income stream form an important part of an effective investment management strategy to maximise risk adjusted total returns for charities whilst minimising investment portfolio volatility.
- August 2019
Written by Jamie McCombe and Matthew Peake for Charity Times