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OPINION

Property panic

Property panic
July 7, 2016
Property panic

One somewhat troubling consequence has been the closure of a number of open ended commercial property funds to redemptions after a rush by their investors to withdraw their cash. There is little doubt that the vote to leave the EU has prompted this – should a recession set in, or large financial institutions decide to leave the UK, the demand for – and therefore value of – offices and shops will fall. The thinking is simple: better get the money out now, or get out less in the future as the UK finds itself on the wrong side of Brexit negotiations.

Whether the potential hit to property has been exaggerated is now, of course, the million dollar question, and one touched upon by one reader in a particularly excellent letter I received this week. The point our reader makes is that although there is some evidence that commercial property is worth a little less, there is little beyond the prevailing poor sentiment upon which valuers can yet conclude that it is worth a lot less. And it is that lack of clarity that has dented confidence rather than any fundamental change.

And while news of the suspension of redemptions certainly sounds dramatic, it says as much about the structure of the unitised funds in question as anything else. When investors in open ended funds want their money back, that money must either come from cash reserves or from asset sales. And few managers have high cash buffers, because underinvestment means underperformance - and maybe their job.

This problem is magnified with property, because the illiquid nature of property compared to securities means cash can’t be raised from asset sales very quickly, even if those assets are flogged at cut price. It’s one reason why we often prefer investment trusts, which as listed companies with share prices do not need to become forced sellers of assets in times of trouble. Another is that in times of indiscriminate sell offs good assets can be picked up cheap as investment trusts move to a discount to their assets.

As our well-informed reader also implies, not all property is created equal – even if demand for offices falls, the strong secular growth that supports the valuations of distribution warehouses or student accommodation will continue, just as the chronic shortage of housing will not suddenly disappear. And I fully agree with their point that property remains a great source of long-term income – especially as the industry is not the debt-ridden beast it was on the eve of the 2008 credit crunch. In short, the panic is unwarranted.