Property funds all the rage with UK investors
Open-ended property funds were the best-selling sector during February 2015, according to the latest sales statistics from the Investment Association. The last time it topped the tables was in May 2014.
Property saw net retail sales of £304 million in the month, overtaking UK equity income funds - the best-sellers for the previous eight consecutive months - on £248 million. Jason Hollands, managing director of communication at Tilney Bestinvest, comments that this surge "[cements] the last 12-months as the best year ever for inflows into property funds".
Other front-running sectors included global on £197 million, Europe ex UK on £192 million and global equity income on £175 million.
Are property funds overheating?
Once again UK all companies trailed the field, with net outflows of more than £600 million. Substantial sums also flowed out of North American funds (-£346 million) and UK smaller companies (-£167 million).
The popularity of commercial property is not surprising, given recent performance. The IPD UK Annual Property index for 2014, which measures ungeared total returns on direct property investments, grew by 17.8% in 2014; of that, 5.2% was income.
However, Tom Stevenson, investment director at Fidelity, is concerned that the market may be overheating. He points to the gross inflows now pouring into open-ended property funds - now well ahead of inflows in 2007.
"The managers of these funds just can't get money invested quickly enough and that cash drag affects their performance and leads to silly deals," he explains.
He adds that at this stage in the cycle, property investment professionals are having to move quickly to get the deals they want. That means that "if [they] waste too much time doing due diligence on a potential property purchase [they] will get beaten to the deal. [They] just have to take a view."
Stevenson does not believe another crash a la 2007 is inevitable, however, for several reasons. One is that yields outside prime areas remain attractive to hard-pressed income investors.
Secondly, unlike the last boom, the current market is not driven by speculative development. "There is [therefore] a shortage of property as demand for space rises on the back of a recovering economy. Careful property selection can therefore still deliver reasonable rental growth," he says.
Moreover, property prices are likely to be supported by the sheer weight of investors' money in this yield-chasing environment.
But Stevenson warns investors to 'know where your fund is invested', emphasising that some eurozone markets may be afflicted by deflation, which tends to push down both capital and rental values.
According to Jason Hollands, investors' preference for European and Japanese funds over the UK is probably being reinforced by the looming general election. The overall net outflow from UK funds "was the largest since the onset of the credit crisis in January 2008", he says.
He adds: "The relative preference for Europe and Japan as destinations for equity investment is in line with the view of some advisers, including ourselves, that the better opportunities are probably in those markets where aggressive monetary expansion programmes are in full flow."
This article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.