This has led to a debate on property values. Properties are usually valued on a multiple of yield. Currently that multiple is about 20, resulting in a yield of only 5 per cent, equivalent to a price/earnings ratio of 20 when compared with a trading company.
However, a property is a depreciating asset – the fabric of the building decays. The interior needs refurbishing. In general, a property only becomes more valuable if someone is prepared to pay a higher rental. Historically, properties were valued at 12 times the yield. A valuation of 20 times the yield is historically very high.
The property market can turn very quickly, just like the stock market. “Put your money in bricks and mortar,” is not a universal investment panacea. Investors believed the only direction for property was up. Advisers should not always take the least line of resistance. If you sit down with any private investor and suggest various asset classes the reaction will be: cash – OK, stocks and shares – not so sure about that, fixed interest – do not really understand it but sounds OK, property – we will have some of that.
The adviser’s job is to suggest where the client should be investing, not what can be easily sold. Investing 10 per cent in property is not bad advice. However, when it gets to 30 per cent and more, it does reek of too many eggs.
The anxiety with a property fund is that the assets are not easily realisable. If investors start withdrawing their capital, there is no problem initially, most property funds have liquidity – predom-inantly property shares and uninvested cash.
Problems only arise when all the property shares are sold and all the uninvested cash has been used to pay out the sellers. At that stage, a property must be sold. A property can only be sold for what someone is prepared to pay for it. When there is no confidence in property, you cannot find many buyers.
Now, if you are in a life company property fund, there is a degree of comfort. Life companies can, for the right price, transfer a property from their property fund to their life fund or their managed fund. I am not going to moralise on that particular transaction but at least there is some comfort.
The real worries are property funds without that facility. At best, they eventually scramble to sell the property, albeit at a knockdown price. At worst, they find their properties unsaleable and their only solution at that time is to suspend redemptions – in other words, refuse to take repurchase orders.
If you look at the small print, most property funds have that ability.
What we saw in the mark-etplace in the past couple of weeks is managers of property funds moving to protect their existing investors. They anticipated there could be waves of sellers. To deter them, they marked down their property funds, as they are entitled, and valued them on a full bid basis.
It is no different to the market value adjusters imposed on with-profits bonds. There is a definite ring of déjà vu. Many IFAs, who recklessly took the least line of resistance with their investors and placed far too much of their money in property bonds, will feel aggrieved – just as they felt aggrieved when they sold too many singlepremium with-profits bonds. I have even noticed Robert Reid, who writes regularly in these columns, claiming that it was not treating clients fairly.
In fact, managers of property funds moving to bid are doing exactly that – they are treating their investors very fairly. They are seeking to protect the people who are still invested rather than allowing a few to get out at a price which may not be realistic if the selling continues.
It is simple in our industry to make the easy sale but when advisers do that they should not hit out at the providers of these products. There has been a succession of them – technology, withprofits bonds and now property. They should ask themselves a question – did I give good advice or did I take the least line of resistance to earn a quick buck?
I was criticised earlier in the year for suggesting that IFAs piling their clients into property funds were incompetent. Indeed, they were.
Peter Hargreaves is chief executive of Hargreaves Lansdown.