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Revival timing

Mutterings from fund management companies in the City suggest that commercial property could be the jewel in the recovery crown.

These upbeat mutterings coincide with UK commercial property delivering a positive return (albeit, only 0.2 per cent) for the first time in 26 months, according to the Investment Property Databank.

I suspect investors may find it a bit galling to learn that fund firms are talking up a sector that has recently caused them such misery. But while fund groups can launch a new fund, many existing funds continue to have troubles of their own, while investors cannot wipe the slate clean that easily.

Tens of thousands of investors were encouraged to buy into commercial property at inflated values in 2006 and 2007, only for prices to come crashing down. Millions of pounds were spent marketing property funds off the back of a terrific period of performance – one group even advertised in OK! magazine. To get an idea of the boom look at the figures. In 2004, sales of property funds totalled just £454m but by 2006 sales had reached £5.6bn. Their timing could not have been much worse. The average property fund has shed around 35 per cent of its value over the past three years.

Many funds are still affected by the credit crisis that brought property deals to a halt, causing liquidity to dry up. It triggered a rush for the exits as investors tried to withdraw cash and resulted in several funds imposing exit fees, suspending trading or introducing a notice period to stem outflows.

In January, Standard Life and Aviva started a six-month queuing system and investors at the front have only recently been given the green light to take their money and run – ironic if the bottom has been reached. It is also perhaps ironic that Standard Life is launching a new property fund because of “attractive property pricing” just as existing investors have been allowed to exit.

Two years on, liquidity is still an issue for many funds and notice periods and exit fees still apply in some cases, although some groups such as M&G have moved to “creation pricing” in the past month.

Trading in the New Star international property fund, which raked in a cool £300m from private investors, is still suspended. Its management team is desperately trying to offload properties to provide a liquidity buffer that will enable the fund to be reopened.

The problem it faces is that investors might – and not unreasonably – decide to cut and run as soon as the fund reopens. The liquidity buffer may need to be sizeable.

History suggests commercial property has a place in a portfolio. Its long-term track record is strong and it offers diversification away from shares.

Opportunistic investors have for some months been signalling renewed interest, looking to pick up distressed properties at relatively high yields. Fund managers are able to invest in assets that yield double what they were yielding two years ago for half the cost – the IPD index is still down by around 40 per cent since July 2007.

There is no doubt the decimation of the commercial property sector will, at some stage, open up a great buying opportunity.

If you believe analysts and fund managers, that time might be now – you just might have a battle on your hands persuading clients to put their faith in bricks and mortar so soon.

Paul Farrow is digital personal finance editor at the Telegraph Media Group

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