I had a number of emails and calls regarding a column I wrote about hindsight and foresight – particularly in light of the ongoing commercial property fiasco.
Most of the readers of this column over the last ten years may have noticed how we walk when others are running, and the calamity that is the overselling of commercial property funds and REITS (real estate investment trusts) is another classic example.
For the last eighteen months I have noticed countless advisers telling customers to move from with profits to property funds. My response to the reader, who has written in, is to mention frying pans and fires and I have warned of the impending plummet on five occasions over the same period.
It is generally believed that most use hindsight to invest rather than foresight. I believe all that matters is where you are going, not where you are coming from, and for eighteen months have been advising readers to be cautious about commercial property. Those of you who took that guidance may have missed the sharp re-rating of commercial property over the last month, and those who invested may wish to consider the remainder of this column.
There has been a sharp sell-off of commercial property and fund managers have taken the opportunity to curb this by effectively re-pricing their investments funds to a bid price (more eloquently put as a very stiff penalty of near 5%).
It was most surprising to see the response in many of the trade advice press where advisers were asking for greater clarity on how these funds work in terms of their ability to do this. (So what you are really saying is that you didn’t know what you sold your client into).
So why have many missed it? The signals were there for ages: The yield (income) from commercial property is less than cash, so why would you take the risk going forward? The current yield for property is also around 4.7% compared to short term borrowing rates of near 6%. (1) Why on earth is that a bargain for an investor? Sure, I hear the wannabe adviser saying that commercial property might have a low yield but there is also the chance of the property price increasing! What? If that happened the yield will drop further – so that doesn’t make sense.
I advised that when the yield dropped below 6% that the investor should have sold. Instead I have watched advert after advert extolling the virtues of this asset class as part of a portfolio of investment funds.
It has taken some time for the penny to drop with the market, that the monetary policy committee’s stance (assault) on interest rates and the residential property owner is cause for concern. This has made its way through to a near 20% drop in the price of major UK property equities and REITS (another potential fiasco I advised against) (2).
The equity market is now pricing in expectations of higher interest rates, and large property shares are now trading at a discount to their net asset value of 20% indicating once again that they believe property capital values will come under pressure.(3)
The general consensus on interest rates is that we will see a top rate of 6.25% – 6.5% (3),
although I hope that the rises have their impact on the economy before the next monetary policy committee meeting.
So what are the options for you if you have a commercial property fund? Consider reducing your exposure, but be careful of any tax consequences. If you are invested via a pension there will be no tax disadvantage. If you are invested via a collective such as a unit trust or OEIC consider that any gain should be less than your capital gains allowance and seek the advice of a chartered accountant if it is. If it is inside a bond the issues are considerable and seek advice from an IFA.
For advice on any commercial property fund call email or if you have a financial query, call and speak to one of our Independent Financial Advisers on 0800 0112825 or e-mail info@wwfp.net
(1) Morley fund managers
(2) Williams de Broe
(3) Jupiter fund group
The value of shares and investments can go down as well as up
Follow us on Twitter
Become a fan on Facebook
Subscribe to the RSS Feed