UK - Investment trust managers predict UK investors will increasingly turn to overseas real estate to seek diversification in a weakening domestic market.

The Association of Investment Companies - the trade body associated with the investment trust industry - notes such property investments are currently trading at a 7% discount to NAV compared with 1% a year ago, and comments gleaned from several UK-based investment trusts suggests the investment opportunities available in the UK real estate market are now being stretched.

Jason Baggaley, manager of the Standard Life Investments property income trusts, suggests "with wide discounts, further launches or growth of existing trusts will be limited, although we can expect to see continued new issuance of companies investing in Continental Europe where investor demand remains strong".

He appears to predict warns trust returns could be hit as he also states "UK commercial property remains out of favour and closed-ended funds control redemptions there might be some sell pressure".

More importantly, Duncan Owen, manager of Invista Foundation Property, has argued the UK Reits regulatory regime may be holding back the development wider investment in residential real estate.

"The on-shore framework for real estate investment trusts does not work smoothly for new creations or for residential property and this is an area that needs some further evolution should the market grow and emulate the most successful REIT markets overseas," said Owen.

Michael Morris, director and manager of the ING UK Real Estate Income Trust, also noted while there has been the growth of European-focused funds in recent months, investors want to diversify again and pursue more global rather than regional strategies.
"The emergence of companies trading at a discount to NAV across almost all the UK real estate sector, whether onshore and offshore, is an issue for all concerned," said Morris.

"We are now entering a phase when growth will be driven by underlying property fundamentals of supply and tenant demand rather than as a result of yield compression. Whilst rising interest rates will adversely affect all asset pricing, the underlying economic growth causing these rises confirms an improving occupational market which is good for property."