Long ReadDec 19 2022

What's happening to UK property funds?

Search sponsored by
What's happening to UK property funds?

Commercial property is an asset class that would be expected to perform poorly in times of recession, but with many of the longest established funds trading at substantial discounts to net asset value following sharp share price falls this year, could it be that the asset class is becoming a bargain?

And in addition to cyclical concerns around the economic outlook, there are longer-term considerations around the future of the High Street and of office space, as remote working and online retailing disrupt an asset class that was once a bedrock of many client portfolios.

Darius McDermott, investment adviser to the VT Chelsea range of multi-manager funds, says: “There are traditionally two reasons to have property funds in a portfolio. The first is to have diversification away from equities, while property is also primarily an income asset."

I think commercial property has a deserving place in many multi-asset portfolios, but they do require specific consideration.Ben Seager-Scott, Tilney

"While the challenges around remote working are likely to have a major impact, valuations are also very cheap, with most of the trusts trading at a minimum at 20 per cent discount to their assets,” adds McDermott.

Ben Seager-Scott, head of multi-asset funds at Tilney, says: “I think commercial property has a deserving place in many multi-asset portfolios, but they do require specific consideration as to their investment characteristics.

"They are generally illiquid, ‘real’ assets so can perform a useful diversification role in a portfolio and offer a potentially attractive and steady revenue stream from rents – but of course they are also subject to economic factors, and the listed vehicles can come with more equity-like volatility, especially in sharply falling markets.

"So they definitely require specific consideration, be they mainstream or specialist.”

Mick Gilligan, who runs the model portfolio service at Killik & Co, a wealth management firm, says one of the reasons property fund share prices have fallen so much this year is because interest rates have risen, and property funds, in addition to investing the cash raised from investors, borrow money to invest further. 

Higher interest rates increase the cost of debt repayments and mean less of the rental income is available to investors as more of it goes to debt repayments. 

McDermott says the share price falls reflect the market anticipating the higher debt repayments in the future, as most property funds borrowed cheaply in recent years but when they come to refinance, will have to pay much higher interest rates. 

I also think one should avoid retail right now, unless they are very long leases to very high-quality companies.Simon King, Vermeer Partners