Property was one of the most popular Investment Association sectors in July for the first time since the UK voted to leave the European Union.
The Property sector was the fifth best-selling sector during the month attracting £164m despite the fact investors are currently negative on the outlook for the UK. Less than a year ago property had been the least popular sector with £530m of redemptions in August 2017. Net retail flows across funds totalled £977m.
“While assets remain far from their pre-referendum high, it shows investors are dipping their toe back in the water,” said AJ Bell personal finance analyst Laura Suter. In the year to date, property sector net sales have totalled £418m, while in 2016, the year of the Brexit referendum, funds suffered outflows totalling £1.8bn.
Bull market protection
There are several reasons investors may currently be investing in property, according to Architas investment manager Nathan Sweeney (pictured), although he stated they are currently underweight the asset class.
“The central bank in the UK is not going to raise rates at the same rate as the US,” Sweeney said. “Secondly, there are concerns this is the longest bull market in history and bricks and mortar will provide you with protection. Even if there is some downside on your property over time, it is a tangible asset.”
He added a weak currency was attracting international buyers.
Equity and property flows at odds with sentiment
However, the IA figures showed UK equities continue to suffer from Brexit uncertainty losing £315m in July and a total of £9.6bn since the referendum in June 2016.
The diverging fortunes of equities and property seemed to be at odds with negative sentiment towards UK assets, said Tilney managing director Jason Hollands. “UK property is a lot more correlated to the state of the domestic economy than the UK equity market,” Hollands said.
However, he said a lot of Brexit anxiety had already been baked into property prices.
Warehouses and depots could even benefit from a disorderly Brexit, he said. “A disorderly, no deal Brexit might create increased demand for depots as the UK diversifies its supply chains beyond the EU and inspection times at ports potentially increase.”
Equity funds suffered outflows of £249m in June with North America the worst selling sector overall losing £315m. Donald Trump’s trade war was blamed for the sharp shift in sentiment toward US equities.
Risk of property funds gating
Uncertainty following the Brexit vote prompted many asset managers to gate their open-ended property funds on the back of high redemptions. The episode prompted a probe from the Financial Conduct Authority into whether daily liquidity was suitable for open-ended funds investing in illiquid asset classes.
The post-referendum scenario was unlikely to repeat itself in the event of a disorderly Brexit, said Sweeney. Open-ended funds had been raising cash levels and focusing on more quality assets since the Brexit vote, he said.
Neither the £3.3bn L&G UK Property or Kames Property Income funds that Architas holds gated following the Brexit vote. The funds are respectively 70.7% and 78.1% invested in direct property, according to Trustnet.
In the Brexit vote aftermath Architas added to £2.2bn warehouse investment trust Tritax Big Box on the view its 8% discount had been overdone.
Brexit, slowing UK growth, the end of quantitative easing and rising interest rates are the reasons the multi-manager is currently underweight, Sweeney said. Structurally, offices and retail faced challenges from changing working and shopping habits, he added.
From September, the IA will separate the asset class into two sectors: UK Direct Property and Property Other.
