New research from Informed Choice has taken an in-depth look at UK property funds, discovering that investors could be in for more than they had bargained for.
News Release: The Problem with Property Funds
Informed Choice chartered financial planner Martin Bamford commented:
“Investors need to urgently consider the nature of their property investments; including where the funds are invested, how much cash they are holding and what they are being charged for the privilege of owning the fund.”
Where is the fund invested?
Informed Choice studied the underlying asset allocation of each fund to understand which invest in UK commercial property and which are investing in other property-related assets, such as global properties and property securities.
The IMA Property sector contains 37 funds, although less than half of these invest mainly in UK property. This means that investors risk exposing their portfolios to overseas property or shares in property companies, rather than the UK commercial property which is more representative of the asset class.
Informed Choice focused their attention on the 14 ‘true’ property funds, which had a three year or longer performance track record, and discovered a variable picture when it came to several important factors.
A range of investment returns
All 14 funds delivered positive returns to investors over the last three years, ranging from the lowest at 0.95% (Aviva Investors Property Investment) to the best at 29.79% (Henderson UK Property).
Investors would have received an average return of 16% over the past three years from these true property funds, compared to 21.6% from the IMA Property sector on average.
This illustrates the additional risk investors in the property sector are taking as a result of their exposure to global properties and property securities. Whilst this risk has paid off for investors over the past three years, there is no guarantee that it will do the same in the future.
How much cash?!
One big issue for investors in the current economic climate is the cash exposure of their property fund. Whilst all property funds require some exposure to cash, to manage liquidity and redemptions, Informed Choice indentified four funds with over 20% of their assets held in cash or near cash instruments.
The worst offender identified by Informed Choice was SJP Property, which held 34.5% of its assets in cash. Scottish Widows HIFML UK Property (24.4%), L&G UK Property Trust (24.5%) and Threadneedle UK Property (25.5%) also had unacceptable high cash levels.
Bamford commented:
“With interest rates at a record low, investors in funds with such high cash levels will see yields being damaged. When you invest in a property fund, you expect to be invested in property.
“We appreciate the challenge that all fund managers currently face, attempting to balance liquidity requirements and cash holdings. What investors will want to see is a clear plan of action to manage high cash levels down to a more realistic level over the next few months.”
High Street stores as property fund tenants
Exposure to retail assets was also identified by Informed Choice as a potential area of concern. Whilst all property funds invest some of their portfolios in retail properties, six funds had over a third of their assets in this sector. Threadneedle UK Property, with 57% of the fund exposed to retail properties, could represent the highest risk to investors during these challenging economic times.
Bamford continued:
“With recent high profile failures in the news, including JJB Sports, investors will want to know that high exposure to retail properties is not setting their chosen fund up for a fall. When tenants go bust, property funds can suffer as rental income is lost and new tenants are hard to find on the right terms.”
Charges, charges, charges
With an expectation that total returns from UK property will be modest over the next few years, the ongoing charges for these funds are an important consideration. Two of the funds levied ongoing charges of over 2% per annum – Aviva Investors Property Investment at 2.36% and SJP Property at 2.15%.
It was noted that these were two of the smallest funds analysed, at £114m and £240m respectively. As a result, the managers would struggle to achieve economies of scale to apply to the costs of these funds. Neither fund has delivered particularly impressive returns over the past three years in order to justify these high costs (14.18% and 11.30% respectively).
Martin Bamford said:
“Commercial property can be an expensive asset to manage, due to the legal and management costs associated with being a landlord. With predicted modest returns from property over the coming years, investors should scrutinise the management charges they pay and consider where a lower cost alternative might deliver better value for money.”
Five questions for investors to ask
Informed Choice is encouraging investors to check for five key factors when reviewing their selected property funds, by asking the following questions:
1 – Are you invested in a true property fund, or a fund invested in overseas property or property securities (shares in property companies)?
2 – Has your fund adequately compensated you for the amount of risk you are taking by investing in the commercial property asset class? Anything less than a 16% return over the past three years is disappointing.
3 – How much cash does your property fund hold? Levels over 20% can result in lower returns, as interest rates on cash are at an all-time low. Does your fund manager have a plan for dealing with this in the short-term?
4 – What is the level of exposure to retail properties? The High Street is likely to struggle over the next twelve months as the UK economy recovers slowly. Will your property fund be dragged down when its tenants go bust?
5 – How much are you paying each year for the management of the fund? Commercial property can be an expensive asset to manage, but any fund charging over 2% per annum needs to justify these expenses with bigger returns.
Data collected from various sources between 10th September 2012 and 3rd October 2012. Performance data as at 2nd October 2012. Past performance is not necessarily a reliable guide to future investment returns. The value of your investments can go down as well as up.
Photo credit: Flickr/Kake Pugh
