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The REIT approach to property funds: How to lower the risks of commercial investments

This Is Money logo This Is Money 5 days ago Anne Ashworth For The Daily Mail

Down suburban streets, you can almost hear a sigh of relief. House prices are rising again, which is good news for the bricks and mortar-obsessed British – at least those who are already on the housing ladder.

But, not far away in the high streets and shopping centres, the news for another type of property is more downbeat, as the crisis of empty, boarded-up shops deepens.

Even Ikea, supplier of the Billy bookcase and other must-haves, a name previously seen as immune to the malaise in retail, recently announced that it was shutting its seven-floor branch in Coventry.

a close up of a cage © Provided by This Is Money

There is some cheer. The CBRE consultancy is reporting a post-election rush by overseas investors to acquire London office buildings.

But renewed demand for glossy City towers is unlikely to provide an immediate boost to the value of other commercial premises and the funds that own these assets.

Some property funds have been having a tough time.

They include M&G's beleaguered £2.4billion Property Portfolio Fund, which is currently suspended, so investors can't take out their money.

Against this background, there is now a debate as to whether many of the investors who entrusted their savings to these funds are out of their comfort zone.

Many saw property, in any form, as solid and secure. But, like investors in the disastrous Neil Woodford Equity Income fund, they are discovering that what seemed like a low-ish risk investment may be nothing of the sort.

Dashing the hopes of its investors, M&G has announced that its fund, which was shuttered before Christmas, will remain closed for the foreseeable future. 

The fund was frozen in response to Brexit uncertainty and a stampede of withdrawals by savers. Subsequently, to raise cash it has sold about £71million-worth of holdings, with more deals planned.

So far, fears have not materialised that the freezing of this fund would create a domino effect. Back in 2016, there was a spate of property fund closures after the EU referendum. 

a close up of a blue wall: Closure: Retailer Ikea is shutting is branch in Coventry © Provided by This Is Money Closure: Retailer Ikea is shutting is branch in Coventry

As yet, others have not followed M&G. However, the Bestinvest platform has removed Janus Henderson UK Property and Aberdeen UK Property funds from its influential best-buy list. Bestinvest cited concerns over liquidity – cash or readily saleable assets – at these funds.

At the time of its closure, the M&G fund held about 5 per cent in cash, against as much as 30 per cent at some of its rivals. But the key issue is that M&G's fund, like the Janus Henderson and Aberdeen ones, is 'open-ended'.

This means investors can withdraw their money whenever they like, so managers may have to dispose of holdings to return the cash. That can be a challenge for a property fund, since it may take months or years to find a buyer for even a well-located mall or office block.

Closed-end funds, or investment trusts, do not face this type of difficulty, since they are quoted on the stock market.

If investors want to get out, they simply sell their shares and there is no need for the fund manager to sell any of the underlying assets.

Among the closed-end funds on Interactive Investor's best-buy list are BMO Commercial Property and TR Property. Some experts favour a few open-ended funds that invest, not in buildings, but in the shares of property companies, and real estate investment trusts, known as REITs, which should make them easier to trade.

On this basis, Ben Yearsley, investment director at Shore Financial Planning, likes the Schroder Global Cities fund, which invests worldwide.

Given the evolving style in which people increasingly work, it is possible to question the need for offices in cities. Some London companies now have desks for fewer staff than they employ, on the assumption that at least one third of their workforce will be either at meetings, travelling or on holiday, But Yearsley contends that we should not exaggerate the extent of this revolution.

He says: 'The type, style and size will be different, but we will still need offices.'

Retail too is unlikely to disappear. Ikea may be saying goodbye to Coventry, but at the same time its investment arm is planning to acquire a number of shopping malls in which to open new-style mini-stores. The business that gave the world the Malm bed and Ektorp sofa has a proven record of knowing what shoppers want – and it is not all online.

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