Property Tracker

dunstonh

There has been a problem with direct property funds.

Historically, direct property was a long hold. People didnt switch out of the funds willy nilly and they were commonly held very very long term. However, the traders started piling money in to them and then drawing it out just as quickly. This created liquidity issues during downturns.

This is not a problem for the long term holds but can be for those that are looking for short term access.

masonic

dunstonh wrote: »

This is not a problem for the long term holds but can be for those that are looking for short term access.

Isn't it also a problem for long term holders because fire sales when property is out of favour lead to crystallised losses for all investors, not just those departing?

I stick to closed ended property funds these days, where people leaving just lead to the fund being at a large discount to NAV (usually a good time to top up).

dunstonh

Isn't it also a problem for long term holders because fire sales when property is out of favour lead to crystallised losses for all investors, not just those departing?

They adjust the pricing level when that happens so those people leaving get penalised.

bowlhead99

lejog2003 wrote: »

While I agree with Bowlhead and Linton, I'm suprised no-one has mentioned the potential for liquidity problems with direct property funds.

Haven't they?

I thought I said:

bowlhead99 wrote:

By contrast, an open-ended fund that directly holds individual properties itself, may not allow you to walk away with your money if you want to redeem out tomorrow. As some investors found last summer in the UK open ended property funds, they may have to freeze redemptions or impose "gating restrictions" because they can't practically sell off a small fraction of a shopping centre or one floor of an office building if a bunch of investors all want to exit at once. Keeping cash on hand to allow for that, can be a natural drag on performance. And theoretically if a lot of people stampede for the exit at once and those "we all wanna dump this fund" conditions persist, they may ultimately have to sell a property against their better judgement to get hold of cash to pay out the departing investors - and a "fire sale" of assets with good prospects is a bad way to make profits in the property game.

So, funds that invest in property company shares: volatile swings, not much of a safe haven if the bottom drops out of the market due to things like credit crunch, high interest rates, everyone in risk: off mode etc

Funds that invest directly into property: less frequent valuations, fewer mood swings, perhaps structurally less sound.

Are there any direct property funds which invest globally, or at least spread the risk further than the UK market? I guess such a fund would have to be large given the price of commercial properties.

I can't think of an open ended direct property one (buy and sell at NAV) with truly global coverage.

The problem is that if you have deep specialist knowledge and experience of the London and Manchester and Belfast and Grimsby property markets from spending the last couple of decades embedding yourself within a team running successful UK-wide property investments, you probably don't also have in depth knowledge of Lisbon, Barcelona, Frankfurt, Athens, Adelaide, Colorado, Seattle, Seoul and Vancouver etc. It's hard to convince investors that they should trust you to implement your strategy in Tokyo just because it worked in Helsinki last year.

Also if you do put together a massive fund as you say (in order to have a multitude of properties in 20+ developed countries) you will need to source investors from all over the world to get it funded. And a problem with marketing to a wide pool of investors is perhaps that if it's an open ended fund you will potentially have all kinds of global issues contributing to people wanting to pull their money out causing liquidity issues (or deep discounts in a closed ended fund).

masonic

dunstonh wrote: »

They adjust the pricing level when that happens so those people leaving get penalised.

I experienced being in an open ended property fund within my workplace pension in 2007 when something along these lines happened, but it seemed the fund still seemed to suffer for a much longer time after the event than I expected, but perhaps that was just me expecting too much from the recovery...

Let me try to illustrate what I think you are saying using some completely made up numbers

Suppose I invested in a property fund composed of 10 x £1m properties, and it has 10 million units at a price of £1. Along comes a downturn in the market and the NAV drops 20%, so each property is now worth about £0.8m.

Lots of investors get worried, because the fund has the word "property" in it, and we all know property cannot fall in value (;)), so a group of them want to pull out their money totalling 1m units. Cash reserves have already been depleted, so one of the properties needs to be sold to meet these new redemptions.

Due to a short marketing period it only fetches £0.7m. So, to protect existing investors, the fund manager adjusts bid price to this level, so those leaving actually see a 70% loss of capital. 1m units are cancelled and the £0.7m is removed from the fund and the remaining investors still between them have 9m units and £9m worth of property as valued before the fall.

Is that essentially how the redemptions work?

chockydavid1983

Thanks Bowlhead, I now better understand why I couldn't find a global direct property fund :-).

Birdwell

Hi bowlhead;

bowlhead99 wrote: »

I can't think of an open ended direct property one (buy and sell at NAV) with truly global coverage.

The problem is that if you have deep specialist knowledge and experience of the London and Manchester and Belfast and Grimsby property markets from spending the last couple of decades embedding yourself within a team running successful UK-wide property investments, you probably don't also have in depth knowledge of Lisbon, Barcelona, Frankfurt, Athens, Adelaide, Colorado, Seattle, Seoul and Vancouver etc. It's hard to convince investors that they should trust you to implement your strategy in Tokyo just because it worked in Helsinki last year.

Also if you do put together a massive fund as you say (in order to have a multitude of properties in 20+ developed countries) you will need to source investors from all over the world to get it funded. And a problem with marketing to a wide pool of investors is perhaps that if it's an open ended fund you will potentially have all kinds of global issues contributing to people wanting to pull their money out causing liquidity issues (or deep discounts in a closed ended fund).

If I look at something like SLI Global Real Estate (GB00B774LD38), they seem to own:

- Ginza 1 Chome, Chuo-Ku 104-0061, Tokyo
- 44 Esplanade, St Helier, Jersey
- Galeria Gniezno, Palucka Street, Gniezno
- Almeda Park, Barcelona
- 3 & 5 Custom House Plaza, Dublin
- 55 St. George's Terrace, Perth
- 432 Dt Kilda Road, Melbourne
- 182 St. George's Terrace, Perth
- Fleming Court, Fleming Place, Dublin
- Pradera Central & Eastern Fund

Does that contradict what you're saying, that there is no global direct property fund; or am I missing an important caveat ?

chockydavid1983

Thanks Birdwell, that does appear to be a global direct property fund:
https://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=TPF97
Whether it's any good is another matter of course :-)

bowlhead99

Birdwell wrote: »

Does that contradict what you're saying, that there is no global direct property fund; or am I missing an important caveat ?

Well, I said I couldnt think of a direct fund with truly global direct coverage. The standard life one is one of the few that tries it, and has been mentioned on this board several times over the years.

It usually has something like 70-75% in direct holdings. You can see from the top ten that those include Tokyo and a couple of Australian cities (that's usually about a third of the fund), then Europe ex UK direct is also usually another quarter to a third, and only in a few key cities, and then a bit in UK/Jersey. They pad out the rest with equities or collective investment schemes to cover some of US and Europe (including CEE).

So, it does have direct holdings in several countries, but not in North America (one of biggest real estate markets in the world)and only really in a few select cities that they feel they know.

chockydavid1983 wrote: »

Whether it's any good is another matter of course :-)

If you look at a 10 year chart you can see how in the first two years and one week of that period they lost 65% on a total return basis (ie including the dividends /income received) and have now recovered somewhat, to only be 30% down. :eek:

Whereas if you had invested at the bottom of the trough in March 2009 you would be looking at a nice return of 100% or so over the last eight years and think it was a decent performer with a reliable 9% annualised return from income and capital growth and not too may dips along the way

You can decide for yourself whether that profile of returns over the last decade would have made a successful diversifier to the popular global equities and bonds funds which also crashed over the two years to March 2009 and grew in the eight years thereafter.

Still, past performance no guarantee of future results, and all that.

chockydavid1983

Is there a good site for seeing exact breakdowns for funds? I'm trying to find a direct UK property fund but most of them seem to have some proportion of direct property, REITs and cash and different sources seem to have different %'s of each. I'm looking at these atm:
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/a/aviva-inv-property-trust-class-2-accumulation
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/l/legal-and-general-uk-property-feeder-class-i-accumulation
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/m-and-g-property-portfolio-feeder-class-i-accumulation
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/f/f-and-c-uk-property-feeder-class-2-accumulation