James ConeyAug 12 2020

What is the future of property funds?

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The core problem with property funds is probably not the structure, it is our expectation – or rather the expectations of retail investors.

I am not talking about liquidity, which has been at the heart of the recent Financial Conduct Authority consultation. 

Daily liquidity in any open-ended investment is a bit of a myth anyway, and even more so in property funds.

Quite why anyone these days is surprised when they have to suspend because of redemptions is beyond me

It is a fact that any eagle-eyed investor should have twigged going all the way back to the last financial crisis, let alone the EU referendum and the Covid-19 crash in February.

Quite why anyone these days is surprised when they have to suspend because of redemptions is beyond me. So fluid is the retail market these days that it is an inevitability.

Then again, I am not sure how a 90 or 180-day notice period for redemptions on unit trust property funds, as the FCA has suggested, is going to help anything.

Rather than solving the problem it just kicks it down the path a little bit – you have still got to find cash to pay back the investor. It just delays the reporting of it.

The commercial property market is not so fast moving that anything is going to happen in three months that could not happen in three days.

No, the problem with property is the British retail investor’s love of it.

We confuse property price rises and yields – residential and commercial – with equity values and dividends, when really as any more sophisticated investor knows, they could not really be further apart.

For that reason the expectation that property and equities will behave in the same way is part of the overriding problem.

And the FCA’s consultation on the future of property does not answer one major question: what is the future of property funds themselves?

It is the long-term health of the property sector itself that worries me. Many of the current portfolios are built around a premise of a vibrant commercial market where companies fill vast offices.

Isn’t that day behind us? If we all work from home more, and big high-profile headquarters are no longer sought after by companies, then surely major restructuring of portfolios beckons.

If I were an investor and the remit of the fund, or the case for property investing had changed, I would want my money back pretty sharpish.

I would want to make sure my portfolio was better positioned towards warehouses and infrastructure than offices.