Several clients have noticed recently that when they go online to look at their Transact accounts, there’s a message telling them that certain property funds have been suspended.
In fact, all open-ended property funds (those which can issue an unlimited number of shares) have been suspended, or gated, since March in response to the Covid crisis. This means there can’t be any movement into or out of these funds. Only two have since reopened.
At Reeves, in our main model portfolios, we advise clients to invest in three property funds: TM Home Investor, Threadneedle UK Property and BMO UK Property.
First, it’s important to emphasise that these funds have not been gated because they are in any kind of trouble. Prices didn’t collapse and there was no run on the funds. They were gated because Covid has made it difficult to value the underlying properties with any certainty. Social distancing makes it hard for valuers to enter properties to appraise them and FCA rules say that property funds must be suspended when valuers face material uncertainty over pricing 20% or more of their assets.
This rule was supposed to come into effect in September, but funds implemented it early.
Property funds were last gated in the market turmoil that followed the Brexit vote in 2016. This happened because a lot of investors wanted to sell their shares. This revealed an underlying issue with property funds: namely that real estate can’t be sold in a few days to provide investor with ready cash. Now, the FCA and property managers are working together on a solution, which is likely to involve longer notice periods for selling shares.
Incidentally, back in 2016, although TM Home performed well, others fell, but they bounced back by the end of the year to finish broadly flat.
At Reeves, we aim for portfolio diversification to achieve a sensible mix of assets for our clients and property is traditionally regarded as one of the main asset classes. Despite Covid, we still believe that property has an important part to play in a diversified portfolio and that it’s particularly suited to long term pension investments. With bonds still giving record low yields and interest rates at historic lows, property offers the chance of modest capital growth and income. The commercial property funds in the Reeves portfolios have averaged a 3.9% yield.
Property also offers a good hedge against inflation and an alternative to more volatile sectors such as US and Asian equities and high yield bonds. This has become more important in recent years as quantitative easing has made assets classes such as bonds and equities more likely to move in step.
Having said that, at Reeves we’re not doctrinaire about any asset of investment, however attractive they might appear in the short term. We buy them and hold them for one purpose only – and that is to maximise the return for our investors.
Property is no exception to this and we will be closely monitoring the market and sector over coming months, gauging the effect of trends such as increased working from home and internet commerce. We have set up meetings with fund managers to discuss how any new regulations proposed by the FCA might affect our portfolios and future strategy.
In fact, throughout the suspension of the property funds, we’ve been holding regular meetings with the fund managers to remain fully up-to-date with their current positioning and plans. Our team always balances what they have to say against a number of other moving parts: such as portfolio/sector weightings and the views of competing fund managers and forecasts of the state of the UK economy, as the property sector is closely linked to GDP and government and consumer spending.
We also regularly consult property market specialists such as agents and portfolio managers who provide valuable insights and information that we can cross reference what we’re hearing from more formal sources.
TM Home offers only residential property exposure, while the Threadneedle and BMO funds have a traditional mix of assets spanning industrials to retail and are, therefore, predominantly commercial. During the pandemic, the assets that have performed best have been logistics, medical and residential but that was unsurprising during lockdown and it’s still too early to gauge how assets prices in the various sectors are moving now.
Much of the property market seemed like good value before the pandemic and recently we heard that some managers are now receiving the rents they missed out on over the past few months – a positive signal from the residential market. Also, more than 175,000 sellers who couldn’t operate during the lockdown are now back in the market and there are a record number of valuations and listings. In addition to that, the average asking price of any property coming onto the market in England and Wales is 1.9% higher than in March. The extension of the mortgage payment holiday will also ease pressure on property prices and encourage stability
However, the recovery of the property market fundamentally depends on the state of the wider economy and unemployment is a key driver: as it rises, it puts downward pressure on property prices. The Bank of England has said that as government-funded support schemes, such as furlough, come to an end, unemployment will soar from its current rate of 3.9% to 7.5% by the end of the year.
For commercially focused property funds, the future will greatly depend on the rate and extent to which life returns to `normal’ now that lockdown has been lifted. If people flood back to shops, restaurants and offices then the commercial sector outlook is bright. But there’s the threat of further local lockdowns and the risk that the population is reluctant to return to its old habits.
There are many factors to take into account but Reeves is monitoring them and will advise you accordingly. The fact remains that property is an asset class for the long term and not one to be dipped into and out of. It offers long term capital growth while paying an attractive yield and lowering the volatility of a portfolio. We believe it has a place in all model portfolios.
This article is for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
Investments carry risk, capital invested may go down as well as up and you may not get back the original capital invested.