Investments and Property Funds

I have an investment portfolio held in a range of investment funds, including a few property funds.  Some of these were suspended during lockdown and I’m worried that they will continue to do badly with many businesses opting to carry on with home working and leaving offices empty.  What do you think?

Carl responds

“Bricks and Mortar” Property funds have come under scrutiny in recent periods of economic stress and some long-standing funds are now being wound up entirely.  This is investment in physical properties, not property company shares.

However, Commercial Property has been a good source of diversification over the years, with the attraction of regular rental income and the benefit of investment cycles which are often different to those of other asset classes.

The main issue with Property investing is liquidity – how easy it is to buy and sell.  The fund must retain enough liquidity to allow investors to exit within a reasonable timeframe and the fund to buy new properties.  Liquidity is partly addressed through holding a high cash balance, and partly through the selling of properties.  However, selling requires a buyer, and this is not always straightforward.

In times of market stress, the cash buffer can reduce significantly, meaning property sales are relied on to meet investor redemptions.  If sales cannot happen quickly enough, the fund may be temporarily closed to new investors and redemptions stopped until liquidity returns.

With open-ended Property funds, investors can buy and sell as they please, without the need for someone to match their transaction.

An alternative way to gain exposure to Commercial Property is via closed-ended property funds listed on the stock market.  However, this involves other factors and risks and is something best assessed by an investment professional.

Overall, Commercial Property investment is something we would look at on a case-by-case basis for our clients. While some doubt has been cast over the future of the sector, and we have taken some steps to sell certain Property funds, there are still some attractive opportunities around.