What is the future of property funds?

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.

What is clear from the great property fund freeze, aside from whatever actions the FCA takes, is that more needs to be done in terms of transparency to enable retail investors to make better decisions about investing in this area.

Bad approach

Nationwide Building Society has got it all wrong with its restriction that bans the use of the bank of mum and dad for some borrowers with smaller deposits.

In case you missed it, Nationwide has announced it is capping any gift towards a deposit at 25 per cent of the deposit amount for lending above 85 per cent loan-to-value..

The logic is that the society wants to see some effort from the part of the borrower that they had the resolve to put money aside. In a small way, I can see the logic of this.

But on the other hand, what a load of absolute nonsense.

Gifted deposits have become a fundamental part of the home-buying process, with 60 per cent of first-time buyers needing one. There is no evidence to suggest those that have them are more or less feckless than those that do not.

Besides, would it not be just as likely that parents who help out children with a deposit are also more likely to help out if the borrower gets in to trouble?

Nationwide is very worried about house prices, that much is certain. But to make assumptions about borrowers who get deposits from their family is just a slap in the face.

Coin toss investment

As if we needed proof that value assessment reports work, the latest one came from Baillie Gifford. And guess what? It was a good one.

We would expect no less from this fund house though, would we? Over the past decade it has carved a role as the best in Britain.

Not every fund is a winner, but at least its success rate is closer to 80 per cent – and should we not expect every single investment fund to be a star?

That is better than the 50 per cent hit rate from other fund houses; that is as good as a coin toss.

James Coney is money editor of The Times and The Sunday Times