A range of new fund launches and subsequent premiums that may prove to be unsustainable over time mean UK commercial property assets are at extreme valuations, according to Alex Moore, analyst at Rathbones.
Mr Moore said the launch of new property investment trusts skyrocketed in 2017, with investors attracted to yields uncorrelated to equities and bonds, as well as inflation-beating returns.
Data from the Association of Investment Companies (AIC) revealed there were eight dedicated UK property trusts launched in 2017, compared with just one in 2016, and five in 2015.
Of the 326 property funds launched between 2000 and 2009, less than a quarter still exist, with the excessive level of debt taken on by such funds in the good times being the reason for the decline, according to Rathbones.
Mr Moore said: "Investors looking to new real estate investment trusts as a potential source of income should be aware of possible risks, including political and regulatory changes and the residual value of property assets."
Simon Edelsten, who runs the £170m Mid Wynd International investment trust, had been very keen on UK property trusts, but said he sold them recently as the yields have started to become less attractive, and were on the wrong side of the interest rate cycle.
Commercial property shares tend to perform badly when interest rates are rising.
This is because rising interest rates should mean higher bond yields, and with the yields from bonds safer than from property, property becomes less attractive.
An enthusiasm for UK property investments is a major theme in the funds run by Mark Barnett, who runs the £10bn Invesco Perpetual Income fund.
He said negativity towards the UK economy has meant many property assets are trading at attractive valuations.
David Scott, an adviser at Andrews Gynne in Leeds, said property is likely to be one of the asset classes most vulnerable to political uncertainty in the years ahead.
At the start of last year the Financial Conduct Authority revealed it was probing the fund industry to try to address illiquidity issues in open-ended property funds.
Proposals included introducing a cap on the illiquid assets held within a fund, splitting the investments of institutional and retail investors, and diversifying the investor base of the funds.
The consultation came seven months after the Brexit vote prompted a crisis across commercial property investments, when several funds were forced to suspend trading to stop more cash from being pulled from the vehicles.
david.thorpe@ft.com
