Property Fund - Suspended

Stompa

http://www.bbc.co.uk/news/business-36708844

le_loup

That's why you should hold property in an Investment Trust.

Kendall80

The property fund into which I invest was devalued last week - Henderson UK property. I've a feeling it may follow suit.

talexuser

Aberdeen has also reduced their values by 3 to 4%. Is this just noise or will it filter to domestic property? On the other hand the reductions might make property even more attractive to foreign investors pushing values up again?

cashbackproblems

We are already seeing reductions in domestic property, people selling is the market signal and big downturn is expected over the next few years, funnily its a vicious cycle more people get scared and pull their cash from property/funds etc

Mistermeaner

A buying opportunity?

bowlhead99

talexuser wrote: »

Aberdeen has also reduced their values by 3 to 4%.

As well they should, at a minimum.

Listed REITs such as British Land have dropped from 750p to 550p; Land Securities from 1150-1200p to 900-1000p. That reflects the overall market appetite to hold assets such as UK commercial property at a time when there's a huge lack of certainty around business appetite to expand or even maintain existing capacity in production, warehousing and office space given the unknowns of a brexited EU deal.

10%, 15%, 20% drop on the REITs is maybe a fair reflection of the market view that commercial property prices have effectively dropped sharply following the announcement that Leave campaign has enough public support to take us out of the massive free market in goods, services, capital, people and/or give us a number of years of uncertainty.

By contrast, open ended property unit trusts or OEICs do not move on the whim of the market but instead price somewhere near to 'NAV' of the assets held. But the actual NAV of a specific property, valued by surveyors and specialists, is driven by market evidence of prices. Such highly illiquid assets haven't had much in the way of observable prices in the last two weeks.

While some UTs might perhaps look to move to weekly instead of monthly valuations - in order to avoid the situation where they're allowing investors to subscribe and redeem at what might ultimately turn out to be a wacky price - these valuations are only a guess when nobody is actually selling up or buying right this moment. Certainly some high profile prospective transactions have been canned, implying their old price was 'wrong' for the current market.

An issue is of course, that if the price of the unit trust assets of 100 should really be 80, but all you can really do is move the price for redemptions from an 'offer' basis of 100 to a 'bid' basis of 95... then the people who are being offered the chance to exit at 95 will snap your hand off to take that 95 and run for the hills.

When the assets of a £1billion fund offering exits at £950m are not £1000m of cash but £100m of cash and £900m of properties that take six months plus to sell, the manager will be screwed when he hits £100m or more of redemptions pretty rapidly. So to protect the integrity of the fund, the manager has to freeze redemptions.

Is this just noise or will it filter to domestic property?

There's a huge disconnect between commercial and domestic property as they are different markets.

On the other hand the reductions might make property even more attractive to foreign investors pushing values up again?

The idea that brexit reductions make commercial property more attractive to foreign investors is perhaps misplaced.

Unlike, say, a London apartment - which theoretically, some foreign investor could buy at a low price in his home currency, rent out for a bit, and then come over here and live in, absent immigration rules - the reason to buy UK commercial property is pretty much just to let out to UK commercial tenants.

What drives the valuation of a 10,000 sq ft office to be, say, £10million? Simplistically, it's the fact you can let it out for £50 per square foot per year, or £500k yield, which is 5%, plus the chance of capital appreciation in line with rent inflation over time.

So let's say there is concern about occupancy levels and what tenants can afford to pay over the next five to ten years when they don't know the shape of the economy (other than, the prognosis isn't good). As such, the expected yield falls to £400k based on the contracts people are likely to be willing to sign, rent-free periods as sweeteners etc; and the value of the building to investors falls to £8m from £10m. Such a fall would seem fair, yes?

If you're an American or Chinese investor, the fall in sale price is more than the 20% fall that a Brit investor sees when the rental income drops 20%. You might agree the fair price is now GBP8m (20x the new lowered yield of GBP 400k a year) but if sterling halves in value on the world stage, the cost of GBP 8m is perhaps only USD 8m instead of the USD 16m that the same pile of sterling would have cost last month.

Great! But the GBP 400k of annual rent is only USD 400k instead of USD 800k that it used to be, because pounds are relatively worthless. So, the US investor can now pay USD 8m for USD 400k income on the UK proprty - but that isn't a bargain because it's still just a 5% yield; you can probably still invest USD 8m back in US or China and get USD 400k a year of income if that's what you want.

Of course, there's a chance that sterling could appreciate in the coming years from this low point and the same GBP 400k (even without improving UK business conditions actually making the GBP 400k back into GBP 500k) could rise on the FX markets to be worth USD 600k or more. Then clearly the US investor would be sitting on a bargain, having only paid his USD 8m for a nice big income stream. So maybe he would be willing to offer a bit more than USD 8m when bidding.

But the best estimate of future exchange rates is the current exchange rate, and the current exchange rate is low, due to objectively sensible reasons, which won't reverse until expectations for UK economy starts to recover.

Bottom line, if a weak pound makes a UK property pretty cheap to acquire for an American, it also makes the annual lease payments relatively worthless to an American, so doesn't make the property particularly desirable, other than the future UK market recovery potential. The UK market recovery potential is there for the UK investor as well. So the US investor is not necessarily going to come riding in and buy up all the property. Sure, UK property could be a play on an appreciating pound, but so could UK equities and UK bonds and UK cash to one extent or another.

Malthusian

le_loup wrote: »

That's why you should hold property in an Investment Trust.

Although this is an advantage, it is often overstated. Whenever property prices are falling the discount on property investment trusts takes such a hammering that even though you can sell, you probably won't want to. F&C Commercial Property for example is currently trading at a 25% discount to the NAV. Most investors will probably do exactly what they would be forced to do in an open-ended fund and wait it out.

Investment trusts can also borrow money which means that there is a real risk of 100% loss if they can't pay their debts, which isn't the case with open-ended funds.

bigadaj

le_loup wrote: »

That's why you should hold property in an Investment Trust.

Wouldn't necessarily disagree, but fundamentally physical property should be held for a long term, trading in and out can be expensive at any time and eventhough people shouldn't panic it's far easier to sell shares than office blocks.

badger09

And more - M&G and Aviva have also suspended property funds

http://www.bbc.co.uk/news/business-36715806

grey_gym_sock

Malthusian wrote: »

Although this is an advantage, it is often overstated. Whenever property prices are falling the discount on property investment trusts takes such a hammering that even though you can sell, you probably won't want to. F&C Commercial Property for example is currently trading at a 25% discount to the NAV. Most investors will probably do exactly what they would be forced to do in an open-ended fund and wait it out.

true. but open-ended property funds' managers also have the problem that they need to try to keep enough in liquid assets to cover redemptions in "normal" circumstances, because they don't want to suspend redemptions except in extremis. so they can end up holding some cash and some quoted property shares, when they'd rather just be holding direct property. which may adversely affect their returns. closed-ended funds (e.g. investment trusts) don't have this issue.

Investment trusts can also borrow money which means that there is a real risk of 100% loss if they can't pay their debts, which isn't the case with open-ended funds.

yes.