Your IndustryJul 21 2016

Property prices and property funds take a bashing

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Property prices and property funds take a bashing

Concerns over lower bank base rates, a faltering pound and foreign buyers pulling out of the UK property market - both commercial and residential - has led to some sticky issues for property investors.

Whether your clients were interested in buy-to-let, buying a new home in which to live, or whether they had investments in property funds or exposure within their multi-asset funds, Brexit has had an immediate impact.

Residential property

House price growth has started to decrease across London and Greater London.

According to the latest data from the Halifax House Price index, annual house price growth in June 2016 was 8.4 per cent, compared with 9.2 per cent in May.

Although average house prices are still increasing, Martin Ellis, Halifax housing economist, says: “There is evidence the underlying pace of house growth may be easing.

“House prices continue to increase, albeit at a slower rate, but this precedes the EU referendum result, therefore it is far too early to determine any impact since.”

Judging by online valuations from Zoopla, some estimated sale prices have already cooled.

For example, on 23 June a five-bed house in Sutton was given an estimated value of £616,000. As at 11 July, it was estimated at £586,000.

Commenting on the Halifax figures, Jeremy Duncombe, director of Legal & General Mortgage Club, says: “As predicted, house prices have eased slightly in the weeks leading up to the EU referendum.

“However, we will only start to see the true shape of the new landscape when next month’s indices are released.

A slight fall in house prices as a result of leaving the European Union would be welcomed by those who are keen to see their children becoming property owners Martin Bamford

“Despite the many unknowns, the fundamentals of the market are still strong. Borrowers need to know that lenders still have the money to lend, and that mortgages are still available for potential buyers.

“The uncertainty we’re seeing in the mortgage market makes it even more important for borrowers to seek professional advice.”

Moreover, confidence in the economy in general and in residential property has started to slow down, with a protracted dip post-referendum, according to Halifax. The Royal Institution of Chartered Surveyors has also indicated a sharp dip in new buyer enquiries post-vote.

Some commentators believe Brexit has created a buyer’s market.

This is the view of Jonathan Hopper, managing director of the buying agents Garrington Property Finders, who says: “The Brexit result means all bets are off, and the market’s psychology has fundamentally shifted.

“While it is too early to know how much prices have fallen, sellers are already behaving as if a fall is coming. Many of those who have to sell are starting to offer discounts, often big ones.

“Sophisticated, opportunistic buyers smell blood in the water and are beginning to swoop. The property market has reversed its polarity from a seller’s to a buyer’s market.”

If so, this would be a boon for many clients of Informed Choice.

Martin Bamford, chartered financial planner for the Surrey-based advisory firm, says: “Many of our clients are parents to adult children who are desperately trying to get on the property ladder.

“A slight fall in house prices as a result of leaving the European Union, if this were indeed a consequence, would be welcomed by those who are keen to see their children becoming property owners.”

If sterling - which has already twice broken a 31-year low since the referendum result was announced on 23 June - falls further, it is likely the monetary policy committee will raise interest rates, which could put pressure on the pockets of mortgage holders.

The biggest drivers in clients’ attitudes to buy-to-let have been recent changes to tax Michael Lally

However, comments by Bank of England governor Mark Carney, indicating a downturn in the bank base rate from its record nine-year low of 0.5 per cent, could signal a more fortuitous time for borrowers.

Tim Sargisson, chief executive of Sandringham, explains: “Mr Carney has suggested we could see an interest rate cut in the near future, as well as adding an additional £250bn in the form of quantitative easing.

“The market is already pricing in a cut to 0.25 per cent and possibly 0 per cent later this year.

“Good news for borrowers with floating rates, which is about half of the UK’s £1.22trn mortgage market.”

That said, Mr Sargisson warns the availability of cheaper money is “unlikely to fuel further increases in house prices, particularly in the south-east where nervous overseas buyers will be considering their options carefully.”

Buy-to-let

Michael Lally, director of Thesis Asset Management, does not think Brexit will have too deep an impact on the buy-to-let market as he points out the big hits have already come from successive tax tinkering by HM Treasury.

He says: “These properties are generally bought to supplement income, so running costs and quality of tenant are the main criteria.

“The biggest drivers in clients’ attitudes to buy-to-let have been recent changes to tax, which are probably more fundamental to the attractiveness of this asset as an investment.”

Informed Choice’s Mr Bamford adds: “The ability to borrow for residential or buy-to-let looks unaffected at the moment, as the UK banking system is in reasonably healthy shape and the government keen to encourage continued lending.”

Commercial property funds

Acting on sentiment has always been deadly for stock markets and this time round, it is property funds which find themselves at the mercy of concerned investors who just want to pull their money out and put it in perceptibly ‘safer’ havens such as cash or short-dated bonds.

However, as a result of queues of people starting to take money out of commercial property funds, seven fund management groups have already had to suspend trading on their property funds, preventing daily dealing and therefore preventing large outflows.

Liquidity, as always, is the biggest problem: if investors seek to redeem millions of pounds a day from the funds, managers will have to sell assets to provide the cash for investors. However, investing in property is not a liquid asset: you cannot sell a commercial property within a day.

Clearly commercial property funds don’t want to find themselves in a ‘fire-sale’ of assets to fund redemptions Tim Sargisson

As at 11 July, some of the UK’s largest property funds, such as the M&G Property Portfolio - which at £4.4bn is the UK’s biggest commercial property fund - temporarily gated their portfolios to investors.

Others, such as Aberdeen Asset Management, imposed a short-term ‘dilution adjustment’ - in other words, as Jason Hollands, managing director at Tilney Bestinvest, says, they have imposed “a reduction to the fund’s price for investors seeking to exit the fund”. You can get out - but it will cost your client.

For Aberdeen investors, this penalty was 17 per cent of the fund’s price. For Legal & General, the downward adjustment reached 15 per cent early in July, although this has since reduced to 10 per cent, as at 18 July.

FE’s Market Intel tool shows the most-sold funds (‘most deleted’) from portfolios from 1 June 2016 to 5 July 2016. Property funds are populating the top 20, as the below table shows:

FE table of most deleted funds from 1 June to 5 July 2016

Manager

Fund

Pf Delete

Rank

Henderson

UK Property PAIF

1228

1

Threadneedle

UK Property AIF

543

2

Standard Life Investments

UK Property Accumulation Feeder Trust

458

3

M&G

Feeder of Property Portfolio

436

4

Aberdeen

Property Trust

423

5

L&G

UK Property Feeder

411

6

Standard Life Investments

UK Real Estate Accumulation Feeder

360

7

L&G

UK Property

355

8

Aberdeen

UK Property Feeder

345

9

M&G

Property Portfolio

278

10

Aviva Inv

Property Trust

278

10

Henderson

UK Property PAIF Feeder

228

12

First State

Global Property Securities

208

13

Standard Life Investments

UK Real Estate

205

14

Threadneedle

UK Property Authorised Trust Feeder

194

15

Standard Life Investments

UK Property

177

16

Aberdeen

Property Share

168

17

Schroders

Global Real Estate Securities

147

18

HSBC

Open Global Property

130

19

Aberdeen

UK Property

109

20

It is understandable for fund houses to gate or put barriers to prevent mass withdrawals. “Clearly commercial property funds don’t want to find themselves in a ‘fire-sale’ of assets to fund redemptions”, Mr Sargisson comments.

Although some of these funds are now opening the gates, Mr Hollands believes dealing could be suspended for three months, maybe even for the end of the year.

He adds: “Actual commercial property transaction volumes could remain low for some months as deals go back to investment committees.

“It is going to be a waiting game that will require patience, so investors in suspended open-ended funds should not expect the gates to be reopened any time soon.”