London remains a top proposition for real estate investors but diversification is more important in the current environment than ever, according to Schroders fund manager Tom Walker.
The manager of the £639m Schroder Global Cities Real Estate fund said while he is positive on London, investors need to think about taking on international property exposure to mitigate the risks of Brexit.
“Real estate should be an ever present allocation in an investor’s portfolio but why would you have an allocation that is just to one market or one sub-sector? Everything else is diversified, so why wouldn’t you do it for real estate?” he argued.
Indeed, many of the open-ended property funds available to investors are UK-focused and the manager suggested that many UK investors have the majority, if not all of their property exposure, in their home country, but this is beginning to change.
“Post-Brexit a lot of the conversations I have been having have been with wealth managers who are saying that their real estate strategy has solely been in the UK and that they now need to diversify because of Brexit,” he noted.
“We’re seeing more money coming into our fund for the diversification benefits. We are around 5 per cent in the UK, the other 95 per cent of our fund doesn’t care about Brexit.”
Yet despite Brexit uncertainty, the UK’s capital city remains the second best city in the Schroders Global Cities 30 index, narrowly behind Los Angeles in the top spot.
Walker said: “I don’t think Brexit changes anything for us for London.”
The Schroders Global Cities 30 index is compiled on a range of factors, including the projected growth of the economy, disposable incomes over the next decade and the size of the population. The latest study included an additional new factor which looks at university ranks.
Top 10 Global Cities
Source: Schroders
“In terms of the data we look at, we forecast out five factors over 10 years and if Brexit were to be a huge disaster for the city then what you are likely to see happen is over time London would fall down the list,” the manager noted.
“But I think the diversification in London’s economy means that it will still be very relevant post-Brexit it will just be in a slightly different way,” he added. 
“Maybe finance leaves the UK but London is still going to be the place where Snapchat has their European headquarters, where Apple have just committed to Battersea Power Station and where Google are spending another £1bn in King’s Cross because of this talent pool that we have.
“So long as you have a city which is diversified and has strong universities that bring in talented graduates and new businesses we think industry needs to be here because that is where the talent is and talent needs to be here because it’s where the jobs are.”
He said the main reason London scored so highly when compared to the other cities is this idea of a diversified economy, which has been proven to withstand turmoil in the past.
“If you think back to the financial crisis, London was the forefront of financial expertise so everyone made redundancies and reduced the amount of space they were demanding.
“Yet after a year and a half of that meltdown rents started growing again and people started getting employed.
“But it wasn’t in finance because they were still reducing their headcounts, it was to the TMT sector – telecom, media and technology.”
He noted that investors are overly worried about the financial sector leaving London without recognising the other areas that the capital can benefit from.
“Right now what is happening in regard to London is that people are solely focusing on one industry and even if you were to assume that everyone in finance leaves there is still enough expertise in other sectors for London to still be very relevant,” Walker said.
“Even if you assume every single European banker leaves, potentially we will become the tech, media, telecoms and maybe legal and insurance hub of Europe.”
If Brexit were to be a disaster for the UK, London has other options available to it as well, with the potential to become a tax haven if required to boost investment into the city.
Walker said: “There have been articles suggesting London turns itself into a Singapore-style tax haven or whatever it might be.
“But I don’t think that London will need to do that to stay relevant. If you think about labour laws, time zones, currency or whatever it might be there are a number of reasons for companies such as Google and Apple to be here.”
However, the fund is just 5 per cent weighted to the UK currently, with the remainder in overseas assets.
“You simply don’t know what is going to happen so it is that point of diversification – we try to find attractive returns outside of the UK as well,” the manager said.
Walker and co-manager Hugo Machin took over the Schroder Global Cities Real Estate fund in 2014 and since then it has been a top quartile performer, though it is 6.37 percentage points below its benchmark, as the below shows.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
“Real estate for us is not something where we ever try to pick the cycle. For me it is not about being concerned that there is a big housing bubble in Sydney because that is not really what we’re doing,” Walker said.
“We are buying companies that we think are managing good portfolios. This is not some kind of residential play on real estate this is the same reason why someone would want to own real estate in a portfolio – it is an alternative.
“If you are investing in one market in one part of the world then maybe you would say London for example is at the top of the cycle and it is all going to go downhill from here or vice versa but because we are investing globally there are always places that we see more attractive valuations or not.”
The three crown-rated fund is 56 per cent weighted to North America, 13.8 per cent in Asia ex Japan and 12.6 per cent in Europe ex UK.
It has a yield of 1.07 per cent and a clean ongoing charges figure (OCF) of 0.92 per cent.