Commercial Property Fund Update

Over the last 24-48 hours you may have started to hear news stories relating to a number of Commercial Property Fund Managers suspending trading in their funds. At the time of writing this update, M&G, Aviva, Canada Life and Standard Life have notified us that they are temporarily suspending trading within their property funds. It is possible that other commercial property funds will also follow suit.

This decision has been made by the above companies to temporarily stop investors from withdrawing their monies, in the fear that the funds will struggle to make redemptions, or be forced into fire sales of properties to fund them. The above fund managers feel that this course of action best protects the interests of the funds’ shareholders (including those not wanting to sell their holdings).

By suspending trading, it allows the fund manager time to raise cash levels in a controlled manner, ensuring that any assets they need to dispose of achieve a reasonable value.

Our view is that commercial property funds are a medium to long term investment holding and although in the shorter term there will be volatility within this sector the historic returns over the long term have been strong. Please see the graph below showing the past performance of the Property Sector over the last 10 years compared to FTSE100 and the Bank of England Base Rate (cash equivalent).

The graph above clearly shows the low volatile nature of UK Commercial Property and even though historically it has followed a general trend compared to the FTSE100 it is relatively uncorrelated and provides good diversification within a client's portfolio.

When advising on a portfolio of funds we look to hold a well-diversified mixture of asset classes and typically commercial property will have between a 10-15% weighting. As a result of our focus on diversification, it will be a small part of your total advised portfolios.

At the time of writing, there are a number of commercial property funds that are yet to suspend trading such as Legal and General, Henderson and Threadneedle. On the basis that they could follow suit and impose a similar suspension on their funds, we would suggest that clients who have a short term investment horizon and may need access to the property portion of their portfolio in the coming few years, may wish to look at coming out of property funds before any potential suspension could occur.

We do not know how commercial property as a sector will perform over the next year due to the number of variables in the market such as political instability and a depreciated pound. Therefore for cautious investors with limited capacity for loss it may be suitable for clients to move their property exposure into a more defensive holding until the dust settles and we are able to make an informed decision on the market.

As mentioned above, based on asset models and historic data, having exposure to property as part of a well diversified portfolio over the longer term typically provides long term growth through a relatively uncorrelated asset class.

Due to the recent vote of the UK to leave the European Union there will be continued market volatility. As you will have seen from our recent articles, we are closely monitoring developments and will continue to communicate with all our clients. Should you have any queries please don’t hesitate your adviser on 01483 802010.