MortgagesMay 19 2016

Floodgates open for pricing shifts in UK property funds

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Floodgates open for pricing shifts in UK property funds

More UK property managers are forecast to join M&G, Henderson and Standard Life Investments in lowering the pricing basis of their funds, as returns on commercial property start to drop and those with money in the sector pull out.

In the past week, the investment giants behind three of the largest property vehicles in the UK have all moved their billion pound funds from ‘offer’ to ‘bid’ pricing.

A reaction to fund sellers greatly outnumbering buyers, it means the costs associated with dumping the investment are borne by those seeking to exit, rather than those willing to stay.

Liquidity problems, the usual stalking horse of property assets, were denied by the fund houses, which blamed the price swings on the general falling out of favour of a sector which has suffered three consecutive months of net outflows, according to Investment Association figures.

Market watchers said property investors should be braced for more bad news.

David Coombs, head of multi-asset at Rathbone Investment Management, sold his last bricks and mortar open-ended funds in April, switching his holding into a real estate investment trust instead.

Speaking to FTAdviser, he suggested the ongoing decline of the high street and fewer overseas investors into UK property were hitting an oversold market for commercial property.

“The excess liquidity of the retail market going into these funds over the past two or three years have pushed yeilds to unsustainable levels,” he said, adding commercial property has had “a good run” and now looks expensive.

Suggestions uncertainty around Britain’s upcoming referendum on the European Union was behind the sector’s woes were “too simplistic” he said.

“The warning signals have been there for some time. One of the signs is when REITs start trading at a discount.”

However he forecasted “a small correction” to more realistic levels over “a massive drawdown” in the market.

“It wouldn’t surprise me if we saw 5 per cent reduction in the commerical property market over the next three to four months,” he said, adding it was “really possible” other asset managers will also reduce the valuations of their property funds.

Ben Seager-Scott, director of Tilney Bestinvest’s investment strategy, said the relative illiquidity of physical buildings and the high transactional costs, means it make sense for funds to swing prices to try to protect long-term investors.

“Though of course it is often not welcome by investors who see their paper valuation suddenly drop around 5 to 8 per cent.”

He said the outlook for property is more subdued now after several years of very strong returns.

“That’s not to say it’s a reason to turn negative on property – we still favour the asset class – but I can understand why some investors may be choosing to take some profit.”

He also pointed to anecdotal tales “Brexit clauses” were being written into some new contracts, effectively cancelling them if the UK opts to leave.

Ben Willis, head of research at Whitechurch Financial Consultants, pointed to commercial property being an alternative home for bond money in recent years, but with corporate bond yields looking more attractive, commercial property is taking a hit.

“It may become an issue if we see significant net outflows for months on end and so properties start having to be sold to meet redemptions – but we are nowhere near that stage yet.”

katherine.denham@ft.com