Exit costs
The other point investors need to bear in mind is that for those funds from which it is still possible to withdraw funds the cost of doing so will be high.
As Darius McDermott, managing director of Chelsea Financial Services pointed out: “Investors should be aware that there will be very high exit charges for doing so, as most physical property funds have already had ‘fair value adjustments’ and moved from offer to bid pricing.”
But, he added: “I would emphasise that long term investors in the asset class, who would otherwise not change their investments, should not be panicked into making a move. Property is still a good diversifier in an overall portfolio and yields on these funds may also increase, which will be a positive for income investors.”
And this is where one’s resolve needs to be steely. There is no doubt that property funds have done remarkably well since the financial crisis. As is evident from the graph below, the market has more than made up the losses seen during the financial crisis, yet from an income and a diversification point of view, given where other asset classes are currently sitting, an exposure to property remains attractive.
For Jason Hollands, the gating of funds is, more than anything else, a reminder of the advantages investment trusts.
“While property investment companies will also be grappling with the same valuation issues as open ended funds, managers do not have to face the prospect of managing liquidity buffers to meet redemptions.”
However, he warned, instead of this, “you may experience equity-like volatility both due to the listed nature of the products and the, generally limited, leverage they employ. This negative sentiment is reflected in widening discounts to published Net Asset Values.
“Core UK listed Real Estate Investment Trusts were trading at about mid teen discounts to NAV ahead of the referendum. Post the vote for Brexit many have sunk to 25-30% discounts. While such bearishness might throw up some opportunities should the UK avoid a recession, investors need to be wary of those trusts with high levels of gearing, a risk that is reflected in those trusts with the deepest discounts. Tennant quality and length of unexpired leases are other key factors to consider since these will determine how secure the rental income stream is.”
