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Why are investors rushing back to property?

Bullish investors seeking diversification ‘should consider the risks of sacrificing liquidity’

Are retail investors piling back into the property sector too quickly? This is the question some fund managers are asking after this week’s news that the sector outsold all others.

The latest figures from the Investment Management Association show property was the highest-selling sector during May, attracting net inflows of £491m.

IMA figures show net inflows into property funds have increased significantly over the past 12 months. After low inflows in 2011 and 2012, net sales tripled in 2013 and have continued to climb.

Property funds brought in some £2.16bn of net sales in the year to April compared with just £390m in the same period the previous year.

Over the same period, the £1.9bn Henderson UK Property fund has attracted the largest net inflows and almost doubled in size after bringing in £844m. The £3bn M&G Property Portfolio has the second highest property net sales after attracting £553m.

The Henderson fund, managed by Marcus Langlands Pearse and Ainslie McLennan, returned 9 per cent over the past year compared with the IMA Property sector average of 3.59 per cent.

The M&G portfolio, managed by Fiona Rowley, returned 8.66 per cent over 12 months.

The Henderson Horizon Pan European Property Equities fund and the Premier Pan European Property fund are the best performers in the sector, returning 23 per cent and 22 per cent respectively over the past 12 months.

However, some property fund managers do not want to see such large inflows, according to Rathbones head of multi-asset David Coombs, who advises investors to be cautious.

He says: “I am not convinced property fund managers want the large inflows we are seeing into their funds because the quality of property they are looking for is difficult to source. 

“Commercial property should form part of your portfolio right now. It shouldn’t be zero. Versus equities and bonds, commercial property doesn’t look too bad but you have to consider the liquidity you’re giving up. The risks are different.

“Secondary commercial property is much more highly correlated to equities. A lot of models out there are saying commercial property is a diversifier. 

“Yes, prime property is absolutely a diversifier but it’s expensive right now. Secondary and third are definitely not diversifiers. Here, you are reaching for yield and all you are
diversifying is returns.”

Investment Quorum chief executive Lee Robertson says investors who are starting to look for value in property funds now could find it difficult. 

“There are some good quality property funds but obviously the sector is quite crowded. People have short memories because it was not long ago that these funds were being gated due to outflows,” he says.

“We moved back into property some time ago but if you were trying to get in now you would find it difficult due to the huge inflows we have seen.”

Cofunds head of commercial Graham Venn says fund groups agree the main reason for property’s increase in popularity is diversification.

“Fund groups are broadly in agreement on the reasoning behind the recent surge in popularity experienced by the property sector, especially in the ‘bricks and mortar’ funds,” he says.

“Equally, they have a bullish view for the future of property funds, and all reference indicators being healthy growth in the commercial and rental sectors, especially in the London and surrounding areas.”

In April last year,  Jupiter chief investment officer John Chatfeild-Roberts said the firm was “beginning to do some digging” to find property  investments for its Merlin funds of funds, having previously steered clear of the sector for a decade.

property

Rather than buy an existing property fund, fund management firm Mayfair Capital, which specialises in property, set up a specific mandate for Chatfeild–Roberts. This is  made up of nine experienced property surveyors who recommend investments to the Jupiter Merlin team before carrying out purchases within the fund – a tax-efficient vehicle in the Channel Islands.

Chatfeild-Roberts says: “The Jupiter Independent funds team have made an initial investment into the Mayfair Capital Commercial Property trust. They have a high conviction in the strength of the fund management team at Mayfair and believe the asset class is a sensible investment for investors seeking diversification away from equities and bonds for income generation.”

Walker Crips Investment Management executive director Chris Kitchenham says commercial property is attractive at the moment but has called for property portfolios to stop calling themselves open-ended because of the lack of liquidity offered.

“We really like commercial property as an asset class at present,” he says. “It benefits from the recovery in the UK economy in a tangible manner backed by real assets. The economic green shoots are feeding into the sector, with very low voids and the sector still looks cheap on many market metrics.

“However, we strongly believe the terms open-ended and commercial property should not be in the same sentence. Providing daily liquidity in an asset where liquidity at a push is three months does not work and causes many systemic problems.”

Chelsea Financial Services managing director Darius McDermott says property does offer a good diversification of income to investors, but adds people should analyse the funds to ensure they are putting inflows to work.

He says: “There are opportunities in the property space which can offer between 6 and 10 per cent returns over the next two or three years. 

“However, you have to analyse what you are buying and make sure the fund manager is not simply holding the new inflows in cash or non-property assets.”

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