Moneywise First 50 Funds update: Commercial Property funds

Halted construction

In July's magazine, we ran the Moneywise First 50 Funds, which includes two property funds that have since been suspended, meaning investors can't get their money out.

These are Henderson UK Property fund and the M&G Property Portfolio. We selected these for their conservative and diversified approach to managing property. Investors who hold these funds will be worried that they are locked in, but while they are waiting if they hold income units they should still receive income from the funds. Holders of accumulation units will see the income roll up in the fund.

Henderson stated: "The dealing suspension will allow for an orderly sale of some properties while liquidity is restored and help ensure that the strong attributes of the portfolio in terms of its mix of properties and quality tenant base are not compromised while cash is raised ahead of a re-opening."

M&G stated: "Redemptions have now reached a point where M&G believes it can best protect the interests of the funds' shareholders by seeing a temporary suspension in trading. This will allow the fund manager time to raise cash levels in a controlled manner, ensuring that any asset disposals are achieved at reasonable value."

Both funds have Q&As for investors on their websites. Henderson will automatically stop any regular investment into the fund but M&G says you need to cancel your direct debits. M&G says if you have opted to reinvest income, you can opt to receive income payments in cash instead. 

What the experts say

Investment analysts at Hargreaves Lansdown state that 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. 

Laith Khalaf, senior analyst at Hargreaves Lansdown says: “Clearly, there has been a knee-jerk reaction to Brexit in the commercial property sector, which may moderate over time.

“Investors in commercial property funds should not make decisions in a panic. Granted the Brexit vote may have the potential to negatively affect the commercial property market in the short run, but long term investors should be willing to ride out periods of weakness, particularly when there has been such a sharp decline in fund prices without much evidence of a slowdown in the underlying property market.”

Jason Hollands, managing director of Tilney Bestinvest has some words of comfort: “The uncertainty around Brexit is undoubtedly a challenge for the property sector but this is not a post Lehman Brothers style moment when the whole financial system faced collapse and the supply of credit - key to property transactions - was in doubt.”

Brian Dennehy, founder of Fund Expert says: "If you were to buy a property fund today you buy it cheaper than a month ago, and with a higher income, with no reason to expect that income to fall – yields are in excess of 4%.  That is very attractive in a low income world.

"From the perspective of an overseas investor in UK commercial property, not only are prices a touch cheaper, but they are quite a bit cheaper due to the weaker pound.
"In a very low income world this makes UK commercial property very attractive.  And because property companies have slowed the building of new property, renewed demand will not be matched by new supply, which will help capital values move higher."

What about property investment trusts?


While the open-ended property funds have been hard hit by pressure from worried investors, commercial property investment trusts - which are not under the same pressure to react defensively when investors take fright - are on huge discounts and offering juicy yields.

The Association of Investment Companies property sector average discount currently stands at 17%. This means it costs less to buy the shares of the trusts than the underlying value of their assets. A number of the large trusts are trading in excess of 20% discount. This includes F&C Commercial Property (21%), which we also included in the Moneywise First 50 Funds.

It may seem counterintuitive, given the open-ended fund suspensions, but two respected brokers, Numis and Winterflood, have slapped a 'buy' recommendation on the sector. Both have tipped F&C Commercial Property, yielding 5.9 per cent.

  • You can see the full list of First 50 Funds, our best ideas for beginner investors, in the July magazine, now on sale in W H Smith stores.


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