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Commercial conditions

The times are certainly changing for retail investors in property funds. There is so much news around covering commercial property fund redemptions by retail investors such as Aegon stopping customers from withdrawing their money from the £2bn Scottish Equitable property fund run by Morley Fund Management.

Friends Provident has imposed a six-month notice period on its £1.2bn property fund while Scottish Widows has imposed a similar delay on policyholders trying to leave its property fund.

The three companies say they have done this to protect investors after high levels of withdrawals due to the current market conditions. But how different was retail sentiment this time last year towards investing in commercial property funds?

With the fanfare around the launch of UK Reits and the previous two years of high growth, retail money piled into property funds. By September 2007, according to the Investment Management Association, over £15.6bn was held in UK-authorised property funds.

How many times have we seen the financial services marketing engines fired up with millions of pounds of advertising to encourage investors into sectors which are at the top of their cycle? It will be interesting to look at future regulatory activity over financial promotions and TCF as we move to a principle-based regime.

I have always been very interested in financial products. I want to know everything about the fund management company, the taxation basis of any investment recommended to clients and the product shape. There are over 30 UK-authorised onshore property funds, half of which are directly invested in property. These are non-Ucits funds and cannot be marketed across the EU.

The remainder are invested in a mixture of property shares, cash and other assets which should not be affected by potential liquidity issues. These can be either Ucits or non-Ucits funds. As the majority of IFAs do not have the permitted business categories to recommend quoted property stock or Reits, they stick to the commission-paying collective funds that can invest in direct property, quoted stock and Reits.

When advising clients, on property fund choice, the need to be fully conversant with the underlying fundamentals that drive commercial property valuations is down the list. Understanding the market in depth is what I believe the Morleys and New Stars of this world get paid for and they should be honest when sharing their market views with IFAs.

What are the rules? A Ucits fund (which can be marketed across the EU) must offer investors the opportunity to redeem units at least twice a month but most do so on a daily basis while a non-Ucits fund (which cannot be marketed across the EU) investing directly in property can operate on a limited redemption basis only if this is disclosed in the prospectus. In any event, redemption must be offered at least once every six months.

Retail investors will act with a herd mentality and believe everything they read in the press or see on TV and if there is nobody in the middle of this “noise” to provide quality independent financial advice, investors may do the wrong thing. I am not saying that all IFAs are fabulous at telling clients when to exit funds but they are much better than the vast majority of clients left to their own volition.

Interestingly, the quality financial advice at the moment is that as property is a long-term investment, current discounts to NAV in efficiently run property companies present a wonderful buying opportunity.

Even the mighty Merrill Lynch reports that one of the most popular investment sectors for ultra-high-net-worth individuals at the moment is commercial property.


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