Residential property hedging inside a pension?

waxingsatirical

Hi all,

I have two problems and was hoping to be able to combine them to make a positive...

Problem 1 is that virtually all of my investments are tied up in residential property, not only that but in a mortgage so approximately 3x geared to property prices.

Problem 2 is that I have a small amount of money locked away inside a pension which is of very little value to me as I can't access any of it for 23 years! Plus it's being constantly chipped away by annual fees.

I was thinking that if I could bet against property price rises using my pension funds then I could significantly reduce my risk in the property market, and I could do so with money that is of very little value to me.

Does anyone know of any pension products that allow for trading derivatives linked to the residential property market? UK property index would be perfect but a basket of construction companies would suffice.

Thanks in advance

RosieBee_2

Hi,

well there 'property derivatives' or even 'property index notes' which could allow you to hedge against your property position. Its worth a look if that is what you are after.

CannySaver_2

Unless I am being thick surely the way to reduce your risk is to invest in a non correlated asset class. If house prices rise then the basket of shares in house builders will also rise, if property prices fall then the shares in house builders are likely to fall.

Why not move into something completely uncorrelated?

As for charges eating away at your pension, with careful choice of investment and a percentage based charging structure this really should not be the case.

The Canny Saver

aqueoushumour01

one issue is that the portfolio of properties you hold will not necessarily follow the movement of a broad property index. they are imperfect substitutes. i can see the sense in theory, and longer term, one would perhaps expect your properties to fall in value if the wider property market is falling (and vice versa) but this is not necessarily the case e.g. properties in london have been rising against falling prices in most other regions. if you held an average property in london and a derivative betting on falling prices you would have been benefiting on both the long and short. in other words there is a lot of basis risk there. Plus i don't know what the costs would be to roll the property derivatives over or pay a fund to do this - presumably these could be quite substantial.

waxingsatirical

Thanks for your input guys, thought I would just bump this as I was really looking for some pratical advice. Was looking for highstreet products, I don't have the kind of funds to pay a financial advisor. Anyone?

aqueous: London house prices have also been falling once you adjust for inflation. The effect of inflation would be reflected in the price of the derivatives, unless you are being ripped off of course.

canny saver: The way to reduce risk is to invest in negatively correlated investments.

gadgetmind

You've already received some good advice. You need a balanced portfolio of uncorrelated assets, with low fees, and you need to keep on contributing.

The Vanguard Lifestrategy trackers have very low fees, don't have any property holdings, and are well balanced across global equities.

At your age, you can go for a heavy equity holding, perhaps even 100%!

Where is your pension now?

atush

I agree, you have too much in property. If your pension is losing ground to fees, then your fees and too high and the growth too low. So change providers and funds. but you dont' need more property in there. Sou,nds to mee like you need mroe cash and equities.

You should have assets balanced over different asset classes, and not to much in any one. Cash, equities and properties, and in tax wrappers if you can.

waxingsatirical

gadgetmind wrote: »

You need a balanced portfolio of uncorrelated assets

Well, everyone would like to be in this position but I simply cannot afford it. To balance my portfolio using plain vanilla asets I'd need to invest a further million pounds! That would leave me ~20% property. Unless you are suggesting that I sell my house and rent? Redistributing the proceeds across other asset classes?

gadgetmind wrote: »

you need to keep on contributing

Actually, my goal at the moment is to pay off my mortgage asap, reducin my gearing in the property market as well as saving on interest payments.

gadgetmind

waxingsatirical wrote: »

Unless you are suggesting that I sell my house and rent? Redistributing the proceeds across other asset classes?

No, it's better if you ignore your primary residence for asset allocation purposes. You then have a balanced portfolio of other assets, which may include commercial property, or it might not. I drew your attention to the Vanguard LS trackers as they specifically *don't* include property with their justification for this being that, a) commercial property investments behave more like equities than property, b) most investors already have heavy residential property exposure.