Property Funds

Property funds have come into the spotlight today, with a number of very high-profile funds deciding to suspend trading.

Why? Well there have been a lot of people trying to get money out of property funds all at once and the Fund Managers wish to protect the remaining investors (billions or millions – depending on the fund). So they have prevented an exodus.

Why is there an exodus?

Because some investors are worried about the commercial property market following the referendum result. Invariably commercial property deals are the first to get kicked into touch when there is a whiff of a recession.

Does this mean house prices will fall?

No. A property fund is commercial property – by which I mean enormous offices, warehouses, supermarkets and shopping centres. Residential property is not in a property fund. The main problem with a property fund is that it is fairly illiquid – hard to sell the local shopping centre to get cash out – on the whole investors hold commercial property for the rental income from shops and businesses that rent the space – this provides income to the fund (yield).

Do I have any?

If you have holdings using any of our model portfolios, the answer is NO. Most investors (generally) do, but I have long held the view that investors need to be able to get out of holdings quickly if they need to. The last credit crunch saw the same problem, with one fund in particular closed for many months. So I took the view (with investment committee agreement) that this was not an asset class that I wanted our clients to hold. There are alternatives (which we use). This will mean we missed some of the favourable returns that commercial property it has provided, but it has also meant we have avoided problems like this.

Is there a problem?

To be blunt, this is largely fear and sentiment due to uncertainty. All predictable – depending on your point of view about “Project Fear”. These things happen. In reality it really means that new tenants into commercial property will rethink, until there is more certainty. There are of course knock-on effects to those connected to the commercial property market – surveyors and an endless list of people that are involved. At this point I am not worried, you shouldn’t be. Economics suggests if there is no new property, supply is limited, thus price ought to rise. This forgets that sentiment plays a considerable part in economic theory of supply and demand.

Will it spread to residential property?

When there is stress, there will always be an opportunity and opportunists. Anyone that has moved house will  know that a property purchases are an enormous headache, there isn’t enough of it anyway, so it is hard to see a logical reason for price reductions. However, we do know that property valuations defy logic. A house is meant to be a home not an investment, but many will disagree with me on that.

I remain watchful. You need not panic, in fact it would be rather pointless to do so. We can only control a very limited number of things in life, our response is one of them.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email