Henderson Property fund manager interview

Henderson UK Property fund, along with many other UK commercial property funds, is currently suspended from trading. This means you cannot currently buy or sell units in these funds.

We met with Ainslie McLennan, co-fund manager of Henderson UK Property, which is on the Chelsea Core Selection and was one of the funds in the Cautious Growth and Income EasyISAs, to get an update and to ask when the fund might re-open.

Ainslie, why has trading been suspended?

“As a result of the vote to leave the EU, a number of investors decided to sell their holdings in physical commercial property funds. When a lot of people want to redeem at once it causes a problem because buildings cannot be sold quickly. The Standard Life UK Real Estate fund was the first to suspend trading and, unfortunately, this resulted in increased stress on other funds.

“The Henderson UK Property fund went into the referendum vote well prepared. 14.3% of the fund's assets were held in cash. Despite this, the fund came under increased pressure as more and more competitor funds ceased trading.

“In order to protect existing investors in the fund the decision was taken to suspend trading. This allows the fund to retain a cash buffer. It also means the fund can take time to sell its holdings to raise cash, instead of having to sell its properties quickly at low prices.”

Will investors continue to receive income?

“Yes. If you hold the income share class you will continue to receive income as normal.”

Do you have any idea when the fund will re-open?

“The suspension will be reviewed every 28 days. It will very much depend on how easy we find it to sell some holdings and on wider economic conditions.”

Can you give us an update on how the fund is currently invested?

“The first thing to say is that it is very well diversified and its average lease length is 10.9 years. This should result in a stable ongoing income, as long as tenants don't go bankrupt. Our tenants are generally high quality. 63.7% are classified as very low risk and a further 23.7% as low risk. We have 549 tenants with the largest, RBS, accounting for just 4.5% of the portfolio's income, so it is not overly exposed to any one tenant. The fund’s vacancy rate is also very low at just 2.8%, excluding development.

“12% of the fund is held in alternatives - one of the highest levels of any UK property fund. These buildings include hospitals, data centres, care homes, hotels, student accommodation and leisure centres. The fund has had a number of small sales complete despite the Brexit vote.”

Chelsea View

Property remains a good diversifier and it continues to pay good income. The yield on the fund has now gone up slightly, because of the 3.98% fair valuation adjustment and also because the fund is now running with lower levels of cash.

The Bank of England is expected to keep interest rates lower for longer and may even cut them further. Government bond yields around the world have collapsed. So finding income has become even harder. In this environment the income from property arguably looks more attractive.

There is a risk that the increased number of sellers will depress commercial property prices in the short term. However, the big fall in the pound has also made UK commercial property much cheaper, and therefore more attractive, for overseas investors.

We continue to like the Henderson UK Property fund over the long term and we think it holds some of the best property assets in the sector.

Watch Chelsea's managing director talking to Henderson UK Property fund manager, Ainslie McLennan