Your IndustryAug 11 2016

Getting the right property investment strategy in place

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Getting the right property investment strategy in place

What the Brexit-induced woes have highlighted is advisers should make sure what sort of investment strategy clients need when contemplating property as part of a portfolio.

For example, do clients need a daily dealing open-ended property fund or would a closed-ended property investment trust be a better option for them?

Ben Willis, head of research for Whitechurch Financial Consultants, believes clients may have been “deterred” because of the recent fund suspensions.

Others believe there is still an investment case for property. Adrian Gaspar, multi-asset investment specialist for Prudential Portfolio Management Group, says: “The UK commercial property market will likely deliver more subdued returns in comparison to recent years.

“However, commercial property is a tangible asset. Many investors like the thought of owning a physical asset with an intrinsic value and, given the UK commercial property market is well-established, it still offers a relatively attractive, transparent, liquid, deep and diverse range of opportunities.”

Reasons for investing

According to Rob Gleeson, head of research for FE, it all depends on whether the client knows why he or she is investing.

The recent issues could be a game-changer for advice on property in the future. It could even signal the end of daily dealing funds. Ben Willis

He says: “Open-ended property funds work best as a long-term source of income, so if clients plan to buy and hold, such funds are a good option.

“However, if they have any potential need to withdraw their money, even in the medium-term, or are looking just for capital appreciation, then perhaps indirect funds that invest in property securities, or a fund of funds could be a better bet.”

Jonathan Wilcocks, global head of retail sales at M&G, says: “Over the long-term, returns from investing in property have been attractive but as a cyclical asset class, property should only be considered for those investors with a long-term investment horizon and/or wanting to diversify a portfolio of different asset classes.”

Moreover, as Phil Clark, head of property investing at Kames Capital, says, investors do need to be aware of costs such as stamp duty (currently 5 per cent of property costs).

Daily dealing

Potential investors should be informed at the start of the process about the benefits and disadvantages of being in a daily dealing fund.

While some investors may want the option to be able to trade more frequently, this may not be the best idea for most retail clients.

Adrian Lowcock, investment director for Architas, says: “If clients are not concerned with short to medium-term liquidity, daily dealing funds will be fine, but clients should be reminded they need to be confident so they will not rush to sell in times of distress.”

Mr Gleeson agrees: “Daily dealing is no guarantee of liquidity, as at times of stress, dealing will be suspended so frequency of being able to trade becomes irrelevant.”

However, Whitechurch’s Mr Willis, says: “The recent issues could be a game-changer for advice on property in the future. It could even signal the end of daily dealing funds as this naturally comes with real liquidity issues.

“The other option is to go down the closed-ended route.”

Diversify

“Commercial funds offer some additional diversification over residential, so I would suggest those first”, adds Mr Lowcock.

Globalisation is also something that should be considered, says Doug Millward, investment manager for Lowes Financial Management.

He says: “Global property funds can add diversification to a portfolio and so investors should look for funds with a low exposure to the UK at the moment.

“Our favoured fund at Lowes is the Standard Life Global Real Estate fund, given its diverse country allocation, with only 8.8 per cent of the fund currently exposed to the UK market.”

For long-term investors, the open-ended structure does not work well for illiquid assets such as property. Annabel Brodie-Smith

Think long term

Mr Millward says: “We believe investors in property funds must be prepared to remain invested for the long-term.

“When selecting funds, we focus on long-term performance, the investment philosophy employed, and on reliable managers whose track records show they can achieve consistent returns.

“Therefore, whether a fund is daily dealing or not is not a deal-breaker for us.”

However, even with a long-term view, advisers should consider which sort of funds would work well for certain investors.

According to Annabel Brodie-Smith, communications director at the Association of Investment Companies: “For long-term investors, the open-ended structure does not work well for illiquid assets such as property.

“During the financial crisis the commercial property sector plummeted, and again a number of open-ended property funds were closed or semi-closed as managers struggled to keep up with the redemptions.

“Even when commercial property is performing well, managers will need to retain a chunk of the fund in cash to meet redemptions. It’s inevitable managers will have to manage inflows of cash when property is fully prices, and outflows when it’s out-of-favour, which is a headache and can affect funds’ long-term performance.”

Brexit blues?

While many UK investors may still be keen on property as a portfolio diversifier or a means of generating additional income over a long investment horizon, overseas investors may be more cautious as the UK negotiates Brexit.

According to James Carthew, head of research for QuotedData, “The outcome of the UK’s referendum on EU membership has caused concern.

“A slump in the UK’s economic activity has been widely predicted and could affect the demand for commercial property, although the effects of this may be concentrated in a few areas, such as Central London offices.”

The ongoing uncertainty over the terms of the UK’s withdrawal from the European Union does mean many overseas renters and buyers, both corporate and retail, have been holding off until there is more clarity.

While sterling’s low price of $1.32 against the dollar may have made UK commercial and retail property seem more attractive for overseas buyers and renters, but according to Mark Harris, chief executive of SPF Private Clients: “The fall in sterling is attracting interest from overseas buyers but they may wait a little to see how the situation settles before committing to a property purchase.”

Hamish Pound, senior investment manager for IP Global, says: “The demand for affordable residential units in London is still there, especially with interest rates so low, despite initial Brexit uncertainty.

“All Central London needs is for house prices to become a little cheaper for people to see value and the great investment opportunities there.”

But while overseas clients wait to re-enter, residential property as well as commercial office and retail spaces could be left without tenants, which could affect rental income for UK investors in the near-term.