PropertyJul 19 2016

Brave vs foolish in property fund exposure calls

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Brave vs foolish in property fund exposure calls

Phil Cook, partner at the private client arm of discretionary fund manager Thomas Miller Investment, said “brave” investors should consider retaining or increasing their holdings in property funds.

His nod to bolder investors comes as thousands withdrew from a number of open-ended property funds after the controversial Brexit vote, causing several fund groups to suspend trading in their real estate vehicles as they sought to protect shareholders.

Mr Cook acknowledged the problems which have emerged due to the illiquid nature of commercial property, but argued the asset class has attractive characteristics for long-term investors who see beyond the illiquidity.

He pointed to yields from rental income, which can protect investors from falls in the value of the underlying asset.

“Traditionally, values have kept up with inflation and owners benefit from a steady income stream, which - with interest rates at 0.5 per cent - is hard to achieve elsewhere at this time.

“Funds with reasonable yields of 4 per cent can experience falls in capital values at a similar level and effectively see little overall change in their price.”

Mr Cook also said investors need to consider whether the significant drop in the price of sterling since the referendum will prove a boon to the commercial property sector.

“For foreign investors, a 10 per cent fall in the value of sterling provides an attractive entry point into the asset class,” he said.

Investors can currently gain exposure to the asset class at a significant discount, he added.

“Most funds moved to a bid price earlier in the year and so investors have already seen a 5.5 per cent drop in the value of their holding.

“There are likely to be further exit costs and investors need to consider whether any anticipated falls in the commercial property market will be greater than the cost of selling.”

Mr Cook added: “For those that believe the predicted fall in commercial property will be short-term or limited in nature, it offers an interesting opportunity to enter at a very attractive price.”

“I think at the moment it’s a particularly dangerous time to be invested in property funds.” Laith Khalaf

But Laith Khalaf, senior analyst at Bristol-based Hargreaves Lansdown, was dubious about Mr Cook’s views and said it was a “dangerous” time to buy into property funds.

He pointed to the gating of property funds, and said investors have to be willing to accept the risk their money could be locked in the fund.

“Even if you’re willing to accept that hurdle, I think at the moment it’s a particularly bad time to be invested in property funds because the prices are moving around so much. There are too many risks which have piled up.”

Mr Khalaf said the prices are not necessarily moving because of the value of the underlying holdings, but are instead bouncing around due to the perception of the underlying asset class and the flows in and out of the fund.

“The pricing risk is too great to dip your toe in at the moment,” he said, adding “extraneous factors” mean even the fund managers cannot control the price.

John Stirling, chartered financial planner at Walden Capital, said: “Property doesn’t require ‘bravery’ to be a good investment - it just requires patience.”

He said the current problems of funds being ‘gated’ or suspended is purely to do with open-ended funds being redeemed, and fund managers protecting those who wish to remain invested from the consequences of having to liquidate property, possibly at under-market value prices.

“The current problems aren’t problems with the asset class - but incompatibilities between the investment type and the fund structure.”

katherine.denham@ft.com