Fund briefing: commercial property funds
A wave of panic selling is disastrous for property investment funds as it drains their cash buffers and forces them into a fire sale of assets at a time when their negotiating position is weak. They also incur steep transaction costs.
To prevent such a crisis, Standard Life took the bold decision to freeze trading in its property fund in the wake of the referendum result. Others, including Henderson and Columbia Threadneedle, quickly followed.
Darius McDermott, managing director of Chelsea Financial Services, believes such moves made sense to safeguard investors. “These were tough decisions to take, but they were also the right decisions,” he says.
Suspensions provide an opportunity for fund managers to raise cash to meet redemptions through a controlled disposal programme, according to Simon Molica, portfolio manager at Morningstar Investment Management.
“They are designed to protect investors’ interests by providing time for fund managers to dispose of assets at valuations that reflect fair value rather than being forced to accept deeply discount prices in exchange for instant liquidity,” he says.
However, he believes the problems are temporary. “We would hope that the suspended funds manage to implement a controlled disposal programme and open when redemptions can be fully meet,” he adds.
This is the latest twist in what has been a tumultuous decade for commercial property. During the boom times, companies wanted space in which to expand and investment funds owning such sites were able to cash in.
But then the global financial crisis came along, and firms put such plans on hold as they struggled to maintain their balance sheets. As a result, anxious investors switched their attention to assets that they perceived to be safer for their cash.
This story is perfectly illustrated by the annual IPD UK Annual Property Index, which shows impressive returns of 17.8% for 2014 – up from 10.7% the previous year and 3.4% in 2012.
When you consider it stood at -22.1% in 2008, you can see how the sector has recovered. Although the figures for last year show a more modest return of 13.1%, industry observers believe the sector still has a role to play for investors.
This year, UK commercial property funds were already suffering outflows from investors before the EU referendum, points out Jason Hollands, managing director at Bestinvest. The Brexit wave of uncertainty simply exacerbated the problem.
“This was partially because expectations of future returns from UK commercial property had moderated but investors were also becoming more cautious and seeking to reduce exposure to illiquid asset classes,” he explains.
So where does this leave the world of commercial property, which is home to around £24.4 billion of UK investors’ cash – £2.5 billion less than the £26.9 billion level of a year ago, according to data compiled by the Investment Association.
Anyone looking to invest must know the difference between property funds: some buy actual buildings, while others invest in the shares of companies involved in this industry, points out Justin Modray, founder of Candid Financial Advice.
“Physical property tends to be a lot more steady in terms of delivering reasonable growth and income, whereas property share funds tend to be more volatile but will potentially perform better when stock markets are rising,” he says.
The direct property route provides more diversification, along with the prospect of rental growth and price appreciation. However, this is counterbalanced by high transaction and maintenance charges, as well as the possibility of void periods.
The shares of property-related companies, meanwhile, mean you’ll be susceptible to stock market fluctuations. Prospective investors, therefore, must consider what type of exposure they would prefer.
Although a number of so-called bricks and mortar portfolios remain closed at the time of going to press, a number are still open for business, particularly investment trusts, as well as those that invest in property shares.
Adrian Lowcock, head of investing at AXA Wealth, believes it’s still worth holding some property for its diversification benefits and suggests that the recent sell-off has actually provided some opportunities.
“Over the longer term, an investment in property is a good diversifier as it tends not to behave in the same way as shares or bonds,” he explains. “The income stream is often quite predictable and has a long-term focus.”
But Laith Khalaf, senior analyst at Hargreaves Lansdown, warns that long-term investors must be willing to tolerate weakness and points out that it’s often a bad idea to sell when prices have fallen.
“The fundamental trends that led to the popularity of property as an asset class are still in place, with interest rates still low and gilt prices still high,” he says. “Economic uncertainty casts a shadow over the sector, but as yet we lack real data on what the full impact of Brexit will be.”
Fund to watch: Standard Life Investments Property Income Trust
This investment trust aims to provide an attractive level of income – along with the prospect of income and capital growth – from a diversified portfolio of UK commercial property.
It invests in the three main sectors – office, retail and industrial – but can also put in up to 10% in other commercial property areas, including undertaking some speculative developments. Its 10 largest holdings include White Bear Yard in London, which is home to a wide variety of businesses, Currys PC World in Denby, Derbyshire, the Ocean Trade Centre in Aberdeen, and Elstree Tower in Borehamwood, Hertfordshire.
Its manager, Jason Baggaley (pictured above), warns that total returns for UK real estate look to have peaked for this cycle and is anticipating that more normalised returns will be on the cards for the next few years.
“The sector remains attractive from a fundamental point of view with reasonable economic drivers and a limited, but growing, pipeline of future new developments,” he wrote in a quarterly fund update.
However, he points out that tenant activity remained robust in the first quarter of this year, despite the economic uncertainty, with continued demand from occupiers on vacant space. His focus will remain on asset management.
“Although uncertainty will remain elevated until the second half of the year, we remain optimistic that tenant demand for smaller buildings outside central London will remain robust and that income will continue to dominate total return,” he says.
Standard Life Investments property income trust
- Lead manager: Jason Baggaley
- Launch date: 19 December 2003
- Total fund size: £328.3 million market cap or
- £466.4 million portfolio market value
- Ongoing charge: 1.1% excluding direct property costs
- Performance fee: Not applicable
- Minimum initial investment: Not applicable
- Website: http://uk.standardlifeinvestments.com
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.