2017: Property Funds Fighting Back As Investors Comes Flooding In

Property funds are pushing Brexit to one side and are now seeing a huge tidal wave of investors looking to take advantage of the UK property market.

As previously stated on DMZ, property funds were forced to hold onto more cash to meet redemption requests and applied a “fair value adjustment” for investors looking to redeem money. But in seven short months the situation has reversed. Columbia Threadneedle UK Property has seen such inflows and demand from speculators that they have had to shield existing investors and put additional costs on people buying into the fund.

Columbia Threadneedle UK has set up a “unit trust”. In this type of fund, units are created when investors put new money in and units are “cancelled” when investors sell or withdraw their money. They typically have a “buy” price and a “sell” price, otherwise known as the “offer” and “bid” prices. These can be manipulated according to the general direction of the flow of investors’ cash. The gap between the two prices – or the “bid-offer spread” – can be wide in the case of property funds, as the transaction costs of buying and selling buildings are high.

This new pricing method has not stopped new buyers for entering the fund.

Don Jordison, managing director of property at Columbia Threadneedle, said: “The change reflects investor recognition of the virtues and strength of property as an asset class.” At present, property funds typically offer a dividend yield of between 3pc and 5pc.

The property sector is among the top picks for 2017 for fund selector FundCalibre, despite numerous challenges for the market over the past year.

In its list of the six fund picks for the new year, research director Juliet Schooling Latter says despite property being “a dirty word” due to the fallout post-Brexit, the asset class remains a valuable choice for investors.

Richard Kirby, manager of the F&C Commercial Property Trust (FCPT), notes that pricing of core properties has held up and surpassed pre-Brexit levels, particularly in the industrial and logistics sectors. These properties typically provide a secure long-term income with fixed uplifts.

“I sold a building in December in Soho for a price in excess of any historic value over a holding period” Kirby added. He encountered ‘stiff competition’ bidding for core properties at the end of last year, suggesting that demand remains strong. The outlook in 2017, particularly once the UK triggers Article 50, depends on the view you take about the likely impact on the UK economy.

Jason Hollands at Tilney Bestinvest argues that the period of maximum uncertainty has already passed.

He says “Brexit undoubtedly poses headwinds for parts of the commercial property market. The area facing the greatest challenge is arguably the City of London office market.” But he adds, “parts of the market appear to be beneficiaries from the most visible impact of the Brexit vote so far, weaker sterling – making the UK a more attractive destination for shopping and tourism, and benefiting UK exporters.”

DMZ thinks there are also other options investors could consider if they do not want to invest directly with a fund. The iShares UK Property UCITS ETF (Exchange Traded Fund) is an electronically traded fund managed by BlackRock that has holdings in all the main real estate investment trusts quoted on the London Stock Exchange.

Alternatively, the iShares MSCI Target UK Real Estate UCITS ETF aims to provide a risk and return ratio similar to physical real estate. Both ETF’s had slow growth in 2016 but are showing serious signs of huge improvement potential in 2017.

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