Introduction
A number of fund houses have shifted the pricing basis on their open-ended property vehicles from offer to bid, in response to worries around liquidity as inflows into the sector dry up. However, several asset managers have already switched back to offer pricing after making the initial move to bid pricing.
Don Jordison, managing director of property at Columbia Threadneedle Investments, which recently changed the pricing basis on the firm’s UK Property Authorised Investment fund and the UK Property Authorised Trust from offer to bid, says: “We have not been immune to the trend of retail outflows from the sector and this decision was made with the aim of preventing any investors being disadvantaged by the negative impact of transaction costs.”
M&G has see-sawed between bid to offer pricing on its Property Portfolio, run by Fiona Rowley, in order to reflect “a change in the balance between buyers and sellers”.
| FUND PICKS |
F&C Real Estate Securities This £106m fund is managed by Alban Lhonneur, alongside deputy Marcus Phayre-Mudge. The aim is to provide exposure to liquid real estate by investing in pan-European property shares and outperform its benchmark, the FTSE Epra/Nareit Developed Europe Capped index. The fund’s largest geographical weighting is to the UK at 33.7 per cent, while Germany accounts for 19.2 per cent. According to FE Analytics the vehicle has returned 60.9 per cent over three years to June 8 2016, making it second best overall in the IA Property sector, which delivered an average 24.2 per cent. In the past year, the fund has returned 17.4 per cent, against the sector’s 6.3 per cent average. Schroder Real Estate Securities Managers Tom Walker and Hugo Machin invest in Reits, equity and debt securities. The £584m fund launched in June 2005 and counts Boston Properties, Westfield and Essex Property Trust among its top-10 holdings. Over 10 years to June 8 the fund delivered 89.2 per cent, compared with the IA sector average of 26.7 per cent. In the past 12 months the vehicle returned 10 per cent, against the sector’s 6.3 per cent average. A regional breakdown shows the largest weighting is to North America at 53.6 per cent, with the Pacific ex Japan region accounting for 14.4 per cent. EDITOR’S PICK Premier Pan European Property Alex Ross runs this £333m fund which invests in European property company shares to provide income and long-term capital growth. FE Analytics data shows over five years to June 8 it has generated an impressive 81.6 per cent, while the IA Property sector average is 36.4 per cent. The vehicle has built up a long track record of outperformance, clocking up a return of 72.8 per cent in the 10 years to June 8, while the sector average for that period is just 26.7 per cent. The fund has 40.2 per cent allocated to retail property, with 24.7 per cent in office space. Among its top-10 holdings are Land Securities and NewRiver Retail. |
In a sign investors should prepare themselves for lower returns from the asset class, Aviva Investors has revised down its annual total return forecast for real estate on the back of lower transaction volumes in the first quarter of 2016. Richard Levis, global real estate analyst at Aviva Investors, notes the IPD UK Monthly index showed All Property returns at 1.1 per cent in the first three months of this year, its lowest quarterly reading since 2012.
Mr Levis says: “Our total return expectations are moderately lower than three months ago, at 6.6 per cent for 2016, and averaging 5.1 per cent per year between 2016 and 2020. Risks we are monitoring in addition to Brexit include the possible re-emergence of the eurozone debt crisis, a faster rise in US interest rates than currently expected, and a sharper decline in Chinese economic output.
“The high levels of financial market volatility seen at the start of this year have eased, but with economic growth having weakened, a general ‘risk-off’ mood has prevailed. Although there has been a partial recovery in the price of UK real estate investment trusts [Reits] since February, the market remains subdued, with many Reits trading at a large discount to their net asset value [NAV]. That may foreshadow further weakness in the direct property market.”
So what does this mean for UK investors in property funds?
The recent moves certainly serve to highlight some of the characteristics of property as an asset class. Richard Philbin, chief investment officer at Wellian Investment Solutions, says: “The illiquidity of this asset class deems an open-ended structure in which property funds are held not the most suitable. Property cannot be tangibly bought or sold in a day, yet the existing structure in which the asset is held is traded daily.
“We believe a monthly or quarterly price point would be better. Similarly, a bricks-and-mortar fund might be better placed in a permanent capital vehicle, such as an investment company, where the manager has a fixed pot of money to invest. Then if there is a run on the fund, the discount/premium mechanism would kick in but the NAV wouldn’t be impacted.”
