Type: Authorised property unit trust
Aim: Income and growth by investing directly in UK commercial property, property-related shares and property-related investment funds
Minimum investment: Lump sum £1,000
Investment split: 80% direct UK commercial property, 20% property shares and investment funds
Isa link: Yes
Pep transfers: Yes
Charges: Initial 3.75%, annual 1.5%
Commission: Initial 3%, renewal 0,5%
Special offer: Initial commission up to 3.75%
Offer period: Until April 30, 2007
Tel: 0800 068 3000
Threadneedle’s UK property trust, the group’s first onshore property unit trust, will invest directly in high-yielding UK commercial property.
Putting this fund into its market context, Hargreaves Lansdown senior analyst Meera Patel says: “Bricks and mortar funds can act as a diversifier in an overall portfolio away from equities and fixed interest. However, given the strength in the property market over the last few years, property should not form the dominating asset in a portfolio and exposure to this asset class should form no more than 10-15 per cent of a portfolio.”
She notes that property is traditionally seen as an income proposition, so this fund can be useful for investors looking for income and/or total return. “The fund will specifically target higher yielding quality assets with the aim to offer a yield in the region of 4.1 per cent at launch, although this will be variable,” she says.
Assessing Threadneedle’s property experience Patel says: “While this is Threadneedle’s first retail offering, it is by no means a novice in this area. The fund has an experienced manager and team behind it with a proven track record of running property money. In fact, they manage £7bn in property assets and have been doing this successfully.”
Patel observes that the manager appreciates that property has had a strong run in recent years. “In light of this he will look to avoid the expensive prime areas of the market where strong demand has driven down yields. Instead, he will apply a flexible and repeatable process, which should deliver solid returns over the longer term. I feel this is a prudent strategy to take at this point in the property market.”
Focusing on the potential drawbacks of the fund Patel says: “The product itself is fine, but it is more to do with property as an asset class that I do not like at the moment. As capital values have risen in recent years, this has led to a fall in rental yields for many prime properties in the UK. This in turn is likely to impact the level of income offered by this asset class in general even though Threadneedle will aim to target the more attractive yielding properties.”
She is also concerned about the amount of money that has attracted the sector in the last year. “Sales of property funds grew by more than six-fold in 2006 compared with 2005 and I believe it was the most popular sector for investors. There seems to be a lot of froth about and I do not feel that investors have quite got the concept that returns are likely to be more subdued going forward. I believe we are going to have a lot of disappointed investors expecting a much higher level of returns from UK bricks and mortar over the next couple of years,” she says.
According to Patel, one thing investors need to bear in mind when investing in property is they probably already have a high exposure to property in the form of their own homes, albeit residential and not commercial property. She thinks it is worth questioning the amount of exposure people have to this asset class already and whether or not a fund like this provides diversification in an overall portfolio.
“To offer an attractive yield on the fund, the annual charges are taken out of capital. This is the case with most property funds. However, this does mean that there is a risk to the capital and after such a strong period for property, the capital values could fall by more than expected if charges are taken this way,” says Patel.
She believes competition will come from the key players in the market, including the Norwich property trust and New Star property fund.
Suitability to market: Average
Investment strategy: Good
Adviser remuneration: Average