Most subscribers will know that while commercial property is a major asset class that offers something different for portfolios with a high income yield from rent and long term inflation proofing of capital values, I have not been keen on it as a portfolio component for several years.
I wrote about my concerns in July 2018 (in fact I even suggested fund suspensions were on the way) and again in July this year when explaining the asset class in a bit more detail.
The ‘gating’ or suspension of the M&G Property fund, one of the biggest, after heavy flows of withdrawals will have been reported in most newspapers over the weekend.
Such funds have had two problems.
Firstly, they are owners of shopping centres and other sites impacted by the downturn in personal shopping as opposed to internet purchasing. Even if a particular fund does not own assets that have had to concede rent reduction, the valuation of property is always on a comparative basis, so all retail assets will have been seeing valuation issues.
Secondly, after the financial crisis when a number of funds closed in this way for quite a while, the regulator has insisted that they hold plenty of cash to meet withdrawals (although M&G still almost ran out), and cash earns no returns, so the overall prerormance of the asset class suffers.
A question now arises as to whether or not the increased use of model portfolios and multi-asset funds by advisers has exacerbated the issue. If they make allocations to a given ‘best buy’ property fund, en masse, it accumulates money that it can be hard for the manager to allocate to sensible purchases. If that fund underperforms because it has then made poor decsions (going into speculative development might be one such) advisers, again on masse, move large sums to another ‘in fashion’ fund. This imposes hard to manage cash flow demands on the funds.
For the time being, I am very happy that the only exposure I have to property investment is the house I live in!
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