News/Events

Challenging times lie in store for property funds [8th October 07]

I am sure many readers of this paper will have invested some of their savings in plans linked to property funds. This will have been a good move with significant returns having been made e.g. the Sterling Property Fund has returned 59.3% over the last 5 years (source Morning Star 14.09.07).

But advisers are waking up to the fact that property funds are not the fail safe they once were and the double digit returns that were there for the taking a year ago are no longer guaranteed.

On top of this a number of well known insurance companies have placed their unit price on what is known as a “bid price”. In simple terms, if you were to sell the units in the fund today you would get a lower value than you would have got one month ago even though the underlying value of the assets may not have changed. It is a clever way of trying to stop too many Investors from encashing at once and make the company have to liquidate a property or two.

In April 2007 Standard Life’s £2.3 billion property fund had a gain of 16.5% over the previous year whereas now it has fallen to 1.8%.

Well, the love affair with property funds appears to be at an end with the honeymoon period over, or is it? Although the reluctance on the part of some advisers to invest client money in property funds is a reflection of the slowdown in commercial property, many still feel they form an integral part of a diverse portfolio. 

According to the Investment Property Forum, five key attributes attract investors to commercial property: secure and stable cash flow, performance, low volatility, diversification and tangibility. It is a question of taking a sensible approach in managing a client’s portfolio, and here you must look at the way the companies run their funds and it is essential to have a well respected team behind an experienced fund manager. For example, Norwich Union Property Trust which has £4.6 billion invested has 100 plus team and has been in this sector for many years. There are other first class funds such as Legal & General, M & G, Scottish Widows, New Star and of course, Standard Life as all have teams at the helm with a long history of managing commercial property.

With the UK property market slowing down, advisers are keeping an eye on international funds as a way to boost their client’s portfolios but do beware! Schroder Global & Fidelity Global Property funds have fallen by 6.4% and 8% respectively since the beginning of the year – source Morning Star 14.09.07. It is essential therefore that your investments are kept under review and that you don’t over expose yourself and have too much capital invested in one fund or with one fund manager. You can, of course, invest into this media through an Investment Bond, Open-ended Investment funds (unit trusts), Investments Trusts or Real Estate Investment Trusts. Remember overseas property can involve currency fluctuation risk.

Property fund managers reserve the right not to switch or encash investments for up to six months due to the very nature of property which is illiquid. The value of your investment may fall as well as rise. Property Funds can offer lower risk to a portfolio but as with all equity investments there are good times and bad times and maybe we are going to experience a little volatility over the next couple of years and certainly more challenging times.

Contact your IFA for a review.

This article was written by Langtons - Published in the Western Morning News, This is Money, 8th October 2007