Our bias against direct investment into property funds based on independent financial adviser recommendation, other than for clients who can afford an extended long term property position remains in place.
Back in 2007, a long standing but uncharacteristic property fund bull run started to unwind as professional investors realised that the ‘old rule’ of property investment having a negative correlation with the stock market didn’t apply anymore.
Increasingly we see the success of property investment being positively correlated with wider economic prosperity.
If companies do not prosper, they do not occupy property, nor pay their rent.
The main sectors in which property funds invest are office space, industrial and retail.
The industrial sector is intrinsically linked generally to the health of the economy, and as lockdown eases, property fund managers report a ”more normal level of activity”, however this may be challenged over coming months.
Coronavirus may or may not have a long term impact on homeworking, potentially challenging the market value of office space and the rent tenants are prepared to pay. The Office of National Statistics reported today that 40% of the working population have returned to work. It remains to be seen if this is a ceiling, or just a step on the ladder.
The retail sector is particularly challenged at the moment, characterised by shopping centre owner Intu’s £4.5billion of debt. Sky News report that KPMG, the administrator on standby, needs £12,000,000 of funding just to keep the doors of Intu’s shopping centres open if the company goes into administration. In the event of going into administration without KPMG being pre-funded, the London Evening Standard report that Intu’s shopping centres will have to close.
The fundamental issue is that property fund managers have a ‘material uncertainty’ of what their property portfolios are worth. Regulation requires that when such uncertainties exist, the fund must be frozen to new contributions and withdrawals, until that uncertainty has been replaced by ‘certainty’.
The head of UK valuations at Real Estate Consultant and Investor CBRE is widely reported as saying that in order to remove the ‘uncertainty’, there needs to be more transactional activity in the marketplace, but, that retail property ‘uncertainty’ is likely to remain in place for sometime.
The M&G Property Fund has been suspended since December 2019 and a further £12.8billion of client’s money has been suspended in property funds since March 2020.
Property portfolios were gated because the coronavirus crisis had caused “material uncertainty” in the UK property market, meaning valuers were unable to value the assets within the funds with the same degree of certainty as would otherwise be the case.
The government’s popularist policy of protecting both residential and commercial tenants from eviction and enforcement has transferred the manifesting risk onto landlords, property companies, property funds and the ordinary members of the public who invest in them.
If the government allow the suspended forfeiture provisions within leases that prevented the use of statutory demands to take rent to lapse, we expect the property market to start to inch back to a new normal. However, we do expect pressure to the valuation of property funds.
It is rumoured that property funds are likely to open in broad unison in order to try and stabilize values against a potential backdrop of reduced demand and backed-up redemptions.
Looking to the future, opinions about the future for property investments remain as polarised as ever, however one constant remains, investors should always be mindful that property can frequently be an illiquid investment.