Fund in Focus - TM Home Investor
An interview with: Alan Collett, Fund Manager
Why should investors consider a residential property fund within their portfolio?
Residential property offers, like any other alternative asset classes, real investment diversification within a portfolio. As and when market conditions change, residential property acts differently to other mainstream asset classes such as equities, bonds, and commercial property, because house price growth is influenced by different factors than those driving returns of these other mainstream asset classes. In addition, residential property provides a regular income for investors, which tends to be very resilient across cycles as ultimately, people need a home to live in. Finally, as many investors worry more about losing money than gaining, residential property has proven resilient in downturns. During the Financial Crisis a decade ago, residential property for instance fell significantly less than Equities, Corporate Bonds or Commercial Property.
What is the TM Home Investor fund, and what are its objectives?
The TM Home Investor fund was established 6 years ago and is an FCA authorised fund that invests directly in residential property across mainland UK. The fund holds over 200 properties, has no borrowing and avoids prime properties, including any properties in Central London.
The fund seeks to capture UK house price growth and generating rental income over the medium to long-term.
Who is the Fund Manager?
That would be me, Alan Collett, backed up by a team including our Chief Investment Officer, Andrew Smith, who brings 30 years of high-level property investment experience.
I have worked in residential property all my life; amongst others, I was a Senior Partner at Allsop, I am a past President of the Royal Institution of Chartered Surveyors, and I am also non-executive Chair of the Hyde Housing Association which owns and manages 50,000 properties.
How do you manage cash reserves and what is the impact of a spike in investor redemptions?
Our target is to hold 10 to 15% of cash to manage redemptions. In extreme circumstances, this might not be sufficient to meet a huge spike in redemptions for a period of time. That’s why we tend to work with advisers and investors who invest in residential property as a long term, strategic investment.
Having said that, our fund has been able to manage redemptions throughout its 5 years since inception, including the time after the 2016 Brexit referendum when a number of commercial property funds had to suspend redemptions.
It is also worth adding that residential property is much more liquid than commercial property; typically, there are 10x more transactions in residential property than in commercial, and a property in our fund has an average value of £250k, versus an average of over £30m in UK commercial property funds.
What is your outlook for UK residential property?
We have already seen a slowdown of capital growth over the past 12-24 months, starting in Central London and then generally in the South East. However, this hasn’t fully spread across the UK, and we continue to see house price growth in some regions.
For 2019, looking at a number of independent house price forecasts monitored by the Treasury, the forecasts range from 1 to 4 %. So, despite some of the headlines, the consensus for 2019 is positive house price growth.
On top of that, we always have the residential income, which, as I mentioned, is resilient across cycles – people need a home in which to live, and rents have tended over the years to move in line with wage growth which has been accelerating recently.
What are the longer-term prospects for the residential lettings market and how do you see it evolving?
A very good question – and one of the main reasons why I am so passionate about residential property in the UK. The majority of let properties in the UK are owned by private landlords, and sadly, many are of poor quality. The UK stands quite alone in that compared to say, the US or parts of continental Europe – in these markets, much of the rental stock is held by large institutional managers, such as asset mangers (like us) or pension funds, or insurance companies.
We strongly believe that UK residential property market ownership will move into that direction over the coming decade, which is not only good for people investing in residential property, but also for tenants looking for better quality homes.
How has the fund performed as compared to other asset classes?
The fund has, since its inception over 5 years ago, done 'what it says on the tin'. The fund captured UK house price growth, and delivered additional returns from income, net of fees.
Over 5 years, the fund has cumulative returns of over 35%, with much less risk compared to other asset classes.
And that's what we aim to do over the medium to long term - we don't expect to be the best asset class in any year, and we don't expect to be the worst asset class in any year. Delivering steady, positive returns year over year, with smaller fluctuations in performance compared to say Equities or Corporate Bonds.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual’s appetite for risk means that the advice for one person may not be the same for everyone. Please remember that the value of your investment can go down as well as up, and may be worth less than you paid in. Information is based on our understanding at 11.12.2018.