The TB-Wise Multi-Asset Income portfolio has three objectives: to provide an annual income in excess of 3% and income and capital growth at least in line with CPI over rolling periods of 5 years. With this in mind and a historic portfolio yield of 4.8%, we continue to hold a significant allocation to property (c.20%) as we believe the sector offers a combination of high initial yield and rental streams that are in certain cases directly linked to inflation or where supply-demand dynamics look set to drive rents higher. It is notable that year-to-date the property sector has outperformed longer-dated UK inflation-linked bonds, particularly those more defensive parts of the sector with rents directly linked to inflation. The sector’s significantly higher initial yield has positioned it much better to weather the increase in government bonds yields seen since the start of the year.
The property sector has broadened out considerably in recent years. Industrial, residential, student and healthcare all face structural tailwinds and have reduced the historic sector concentration to more cyclical retail and office markets. On top of structural headwinds of online retail penetration and a post-Covid desire to work from home, current macro-economic backdrop has increased recessionary concerns for these areas, however, we believe any comparisons to the performance of the sector in 2007/8 are misplaced. Heading into the financial crisis, the sector had enjoyed a 5-year run of significant growth in asset values whilst shares sat at a premium to those inflated levels. At the same time, gearing within the sector stood at eye-watering levels that provided no downside protection. Land Securities, for example (not held), had seen its asset value rise 80% over 5 years, its portfolio was valued off a yield of 5%, the same level as the UK government bond yield, and the shares stood at a small discount. Loan to values for the portfolio stood at 59%. Today, given Brexit, Covid and retail headwinds the NAV has fallen 25% since 2017. There is now over a 3.0% difference in the yield on the portfolio and the prevailing government bond yield and markets have increased this buffer further by placing the shares on a 36% discount. At the same time the LTV is a much more conservative 34%. These more cyclical areas appear distinctly out-of-favour. Whilst rental growth will undoubtedly slow as recessionary concerns increase, the sector does not appear to suffer from the toxic combination of overvalued properties and over-indebtedness that would put its attractive yields at risk.