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FEATURE: Commercial property fund update

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01/02/2008

All eyes are on commercial property funds at the moment as investors continue to defer withdrawals. Barney McCarthy finds out the latest

Even if you do not have a vested interest in commercial property, you can’t have failed to see the press coverage the sector has garnered over the last month or so. As the value of UK commercial property is on the wane, many providers have frozen withdrawals, meaning that investors can not access their money. According to the Investment Property Databank (IPD), total return to property investments in the UK in the last quarter of 2007 was -7.6%, the biggest fall in the history of the index and an unprecedented reversal that has dragged the 12-month total return to -4.4%.

AXA was the latest provider to freeze funds at the end of January, implementing a temporary deferral on movements out of its life and pension property funds for up to six months. While providers will argue that their terms and conditions cover such eventualities, there is growing concern that such warnings are not featuring prominently enough in their marketing literature.

Treating customers fairly

City watchdog the Financial Services Authority (FSA) has taken a keen interest in the sector recently, placing particular emphasis on how the funds target consumers. The FSA’s ‘Treating Customers Fairly’ initiative covers such marketing and promotions and is a code that all regulated firms must adhere to for the safeguarding of their customers.

Dan Waters, director of retail policy and themes, told delegates at a fund management industry conference last week: “We expect firms to consider on an ongoing basis how they communicate with investors. It is critically important, of course, for a firm to ensure that its promotional materials explain the particular nature of the risks associated with such funds, in particular the potential risks around liquidity and valuation.

“As important as this disclosure is, it is also essential that firms monitor on an ongoing basis their marketing literature and communications with intermediaries and investors to ensure these are continuing to provide a true reflection of the risks inherent within these products. Further, we expect firms to communicate important issues such as the suspension of redemptions, to investors in a timely and balanced manner.”

Be aware

But should you be worried about any UK commercial property holdings in your portfolio? Meera Patel, senior analyst at IFA firm Hargreaves Lansdown, thinks not. She says the doom-mongering headlines have not helped the sector. “Investors need to look at the bigger picture and realise that the fortunes of property are cyclical,” she says. “There is no need to panic at the moment just because prices have come down.”

Patel believes that providers do make investors aware of redemption limits upfront. Indeed, Jason Butler, partner at IFA firm Bloomsbury Financial Planning, says the TCF issue depends on how investors access the products. “If investors are going direct then the provider should make it clear, but if they use an adviser, the responsibility lies there to inform the investor about the risk characteristics,” he says.

Butler advocates the use of daily-traded funds over funds such as commercial property, which he describes as “easy to get into and difficult to get out of”.
 
Property can be lucrative at times, but do not look at bricks and mortar as a permanent cash cow. It is an illiquid asset and can drop in value at any time, so expect to endure lean periods while you wait for the market to turn again. You are unlikely to make a quick buck out of property, so look at it as a long-term investment and you may well reap the rewards. 

For more information on the current state of commercial property investment in the UK, click here.

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