UK property funds see huge pricing shifts

by Jonathan Adams

More UK property managers are predicted to join M&G, Henderson and Standard Life Investments in lowering the pricing basis of their funds, as returns on commercial property start to drop and those with money in the sector pull out.

In the past week, the investment giants behind three of the largest property vehicles in the UK have all moved their billion pound funds from ‘offer’ to ‘bid’ pricing.

A reaction to fund sellers greatly outnumbering buyers, it means the costs associated with dumping the investment are borne by those seeking to exit, rather than those willing to stay.

Liquidity problems, the usual stalking horse of property assets, were denied by the fund houses, which blamed the price swings on the general falling out of favour of a sector which has suffered three consecutive months of net outflows, according to Investment Association figures.

Market watchers forecasted more bad news for property investors.

David Coombs, head of multi-asset at Rathbone Investment Management, sold his last bricks and mortar open-ended funds in April, switching his holding into a real estate investment trust instead.

Speaking to FTAdviser, he suggested the on-going decline of the high street and fewer overseas investors into UK property were hitting an oversold market for commercial property.

“The excess liquidity of the retail market going into these funds over the past two or three years have pushed yields to unsustainable levels,” he said, adding commercial property has had “a good run” and now looks expensive.

Suggestions uncertainty around Britain’s upcoming referendum on the European Union was behind the sector’s troubles were “too simplistic” he said.

“The warning signals have been there for some time. One of the signs is when REITs start trading at a discount.”

However he forecasted “a small correction” to more realistic levels over “a massive drawdown” in the market.

“It wouldn’t surprise me if we saw 5 per cent reduction in the commercial property market over the next three to four months,” he said, adding it was “really possible” other asset managers will also reduce the valuations of their property funds.

Ben Seager-Scott, director of Tilney Bestinvest’s investment strategy, said the relative illiquidity of physical buildings and the high transactional costs, means it make sense for funds to swing prices to try to protect long-term investors.

“Though of course it is often not welcome by investors who see their paper valuation suddenly drop around 5 to 8 per cent.”

He said the outlook for property is more subdued now after several years of very strong returns.

“That’s not to say it’s a reason to turn negative on property – we still favour the asset class – but I can understand why some investors may be choosing to take some profit.”

This article is for information purposes only.
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