Fears have heightened for the future of UK property funds after a number of investment managers switched pricing methods in an attempt to deter investor sales.
Although the average property fund has seen impressive growth over the past three years, recent action from the likes of Aberdeen, Henderson, M&G and Standard Life has raised questions about the short-term future of the property sector.
Henderson, M&G and Standard Life made the move in May, with Henderson wiping out around 5 per cent for investors, after switching £4.1bn from its UK property vehicle from offer to bid pricing. This followed the same tactic by Aberdeen, which transferred £3.5bn in its UK Property Trust in January.
Matthew Harris, independent financial adviser at Dalbeath Financial Planning, is not concerned about these changes and said the move was a positive one for the future of the sector. “There will be times when people worry but managers have learned from 2008 – they tend to hold large cash positions, and are ready to penalise investors rushing to exit. The best strategy in such situations is to hold into your positions and ride out any short-term bumps. That way you are not hurt by the move to bid pricing and will enjoy the longer term growth these funds can provide.”
During February, investors withdrew £119m from the Investment Association’s Property sector, more than any other month since 2008 and there has also been three months of consecutive outflows from January to March. This has coincided with the UK’s Reits index – FTSE EPRA/NAREIT UK – dropping by 6.69 per cent from the start of the year up to 16 May.
Despite this activity, property funds have performed favourably against other asset classes over the past three years (see graph). According to FE, the average IA direct commercial property fund has returned 37.34 per cent since 2013, compared with 13.36 per cent from corporate bonds, 12.74 equities and a 11.44 per cent rise in gilts.
“The Brexit referendum has created enough uncertainty to depress the UK real estate market,” said Daniel Greenhough, investment manager at Lumin Wealth Management, who suggested this was due to stretched yields in prime London locations and reduced investment trust pricing signalling less demand. Mr Greenhough explained stable lending and low gilt yields are supportive factors for the sector and added that, although growth is likely to be tamed, opportunities still exist in property funds, “Returns from real estate might be a bit more muted than in recent years, but should remain positive with most of the return coming income rather than capital growth. Investors can also look to the investment trust universe for pockets of value.”