PropertyOct 20 2017

Open-ended UK property funds could see outflows

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Open-ended UK property funds could see outflows

Richard Shepherd-Cross, fund manager of the Custodian UK Commercial Property Real Estate Investment Trust, said the income element of investment trusts was “chiming with retail investors” and explained the increased access to investment trusts via platforms was the “beginning of a trend” that had a long way to run.

In the aftermath of the EU referendum last year, a slew of open-ended UK property funds were suspended from trading as investors tried to pull their money out.

Mr Shepherd-Cross said in the past open-ended funds had been the only route to market for retail investors who wanted to get exposure to UK commercial property. 

He suggested they were “largely unfit for retail investors” as much of the liquidity is taken up by professional investors who, in June 2016, were able to get out of the funds before retail investors.

But Jonothan McColgan, chartered financial planner at Combined Financial Strategies, argued: “Personally I do not see why an adviser would use an investment trust (IT) over an Oeic due to liquidity risks.

"The reason for this is simple: if an Oeic or Paif (property authorised investment funds) increases their sale levy or stops all sales entirely it is due to a fundamental drop or expected drop in commercial property asset prices, which could create a run of investor money out of the fund.

“If you hold an IT it is true that you could get your money out by selling but you would be selling along with many other investors at the worst time as share prices crash.” 

He added: “If anything, due to the potential gearing position and impact of investor sentiment to magnify the impact on falling share prices I would view ITs to be riskier than Oeics/Paifs in a falling property market.”

Those funds which were suspended following the vote to depart the EU were reopened a few weeks or months later.

Mr Shepherd-Cross acknowledged the contagion hit closed-ended property funds as well.

But he insisted the Custodian Reit was “Brexit-proof” as it had no property in Central London, other than one industrial property in Old Kent Road.

He noted if there was a “poor Brexit outcome” investors were likely to want to be invested in real assets that produced a high level of income, after some members of government remarked at the end of the two-year negotiation period Britain could be out of the EU with no deal.

“If we were to get a bad deal, Custodian would feel like a safe port in a storm,” he said.

Mr McColgan expressed his concerns about the Reit structure though.

He explained: “As they are basically a form of equity, you find that they, along with property investment trusts, tend to correlate more closely with equities rather than the underlying property asset.

“This means that if you are holding commercial property to diversify an investment portfolio that REITs are not suitable and that you need to invest in a property fund that invests in bricks and mortar, with the liquidity risk it carries.”

Mr Shepherd-Cross observed there was “more nervousness in and around Central London markets than in regional” areas as the office market is most exposed to the Brexit negotiations.

The Custodian UK Commercial Property Reit has an overweight to industrial property which accounts for 43 per cent of the portfolio, compared to an underweight in office space.

The manager admitted in the industrial market “some people were paying very keenly for tomorrow’s rental growth, confident it is coming”.

But he added, generally in commercial property values had grown in line with rental growth.

eleanor.duncan@ft.com