Property appetite lagging

To calculate the rebalance, every six months FE fundinfo collects fund and asset allocation recommendations from its exclusive panel of advisers and wealth managers to suit high, medium and low-risk investors.

These allocations – drawn from current advice given by panellists to their own clients – are amalgamated into the AFI Aggressive, AFI Balanced and AFI Cautious indices.

UK wealth managers have significantly reduced their exposure to UK property as an asset class

The AFI is a valuable ratings tool for investors as it shows what sectors and asset classes wealth managers are investing in for their clients and gives a useful indication of where the market professionals see opportunities and challenges.

The most recent AFI rebalance shows that UK wealth managers have significantly reduced their exposure to UK property as an asset class.

For those of us who have been following the sector over the past year, this perhaps should not come as any great surprise.

At the end of 2019, two high-profile property funds – M&G and Prudential UK Property – were both suspended following ongoing liquidity issues.

Additionally, the Financial Conduct Authority has made it a priority in 2020 to examine the nature of open-ended funds more closely.

Moreover, six adviser groups removed Investment Association UK Direct Property funds from all of their risk-profiled portfolios.

But how has UK Property performed compared to other UK sectors?

As the chart shows, property has lagged behind sectors such as IA Technology & Communications, IA Smaller Companies and – despite its unpopularity – IA Targeted Absolute Return.

While it has not suffered any of the recent well-documented volatility of these other sectors (particularly in equities), it has still only returned 0.15 per cent over the past year.

Within the sector itself, its best performers over the past year have also undergone a period of relative low returns.

Time Investments’ Commercial Long Income PAIF fund, which invests 90 per cent of its £500m plus assets in UK property, has returned just 4.46 per cent over the past year.

Much of these assets are tied up in major projects such as Temple Quay in Bristol and PGL in Liddington.

Of the rest top performers within the sector, Time’s Social Long Form Income fund (3.97 per cent), Margetts Fund Management’s MGTS St. Johns High Income Property fund (3.25 per cent), L&G’s UK Property fund (2.97 per cent) and Janus Henderson’s UK Property PAIF fund (2.68 per cent) have all returned positively, if narrowly.

At the other end of the scale, Aberdeen’s UK Property fund has been the worst performer in the sector over the past year, falling 7.99 per cent in that timeframe.

It should also come as no surprise that M&G’s Property Portfolio also appears in the bottom five performing funds, losing 7.23 per cent of its value.

The fund invests in large retail projects across the country, and the struggles in the retail sector over the past few years have been well-documented.

The suspension of property funds should not necessarily be a cause for alarm on their own.

They have precedent, as we saw in the wave of funds suspending redemptions in the wake of the 2016 EU referendum result.

Nonetheless, the issue of open-ended funds and investor redemptions within illiquid assets will need to be addressed sooner rather than later if we are to run into periods of economic uncertainty.

It was often said that UK Property was always a safe bet, particularly in comparison to more volatile sectors.

While all the cranes in the UK cities’ skylines may hint towards a burgeoning industry, a closer look at the figures suggests a mixed picture.

When the AFI is rebalanced again towards the end of the year, we will find out whether our panellists’ caution has been vindicated.

Charles Younes is research manager at FE Investments