Your IndustryOct 1 2014

Impact of current inflows on property funds

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Property has been one of the most popular asset classes for new investment over the past year, according to the IMA, leading to some of the larger retail funds seeing big inflows from investors seeking to diversify away from equities and bonds and seeking a new income stream.

At times, managers have not been able to invest this immediately into direct property, resulting in high levels of cash being held. Some managers have also bemoaned the wider effects on the sector, as competition to put money to work pushes up asset prices.

In a strong market, Chris Ludlam, head of real estate capital for Schroder Property Investment Management, says the excess of cash in many funds currently will dilute returns.

Mr Ludlam also acknowledges investors should be aware of the possibility of property prices being bid up to secure investments, and that this may also have the effect of lowering long-term returns.

Funds which invest in property securities (i.e. property company shares) are better placed to deploy additional capital into the market in a shorter time frame, Mr Ludlam says.

He points out strong inflows have led to many retail funds adopting an ‘offer price basis,’ which is where a swing pricing policy is adopted. This is a sensible approach as it protects existing investors from acquisition costs of around 5.8 per cent, Mr Ludlam says.

He says this means that investors should be aware that the offer price is likely to be 5 per cent to 6 per cent above the prevailing net asset value of the fund and this will affect their performance in the short term.

In contrast to some of the more negative views, Hugh MacTruong, proposition manager of Legal & General Investments, says increasing inflows can have a number of benefits for inidividual managers including increased flexibility and the opportunity to target larger lots sizes.

He says this manoeuvrability in the market allows the fund manager to acquire larger targets, which is beneficial as small lot sizes can have a diminishing impact on fund performance.