Calculators

Overview of Property Investments

August 2008

After three years of startling returns for commercial property, the bottom seemed to fall out of the market towards the end of 2007. Rising interest rates did the early damage and the credit crunch finished things off. Property funds that had attracted billions following changes in the ISA rules were forced to devalue and impose penalties for investors selling out. So what now for investors who still have property holdings?

Funds invested in property shares were the first to be hit. Arbitrageurs who had entered the property sector to make quick money on the introduction to REITs, exited promptly afterwards, dragging property shares down – and, along with them, the value of funds invested in those shares.

However, much of the retail money went into direct commercial property funds. In this case, as commercial property values started to fall, nervous investors scrambled to get their money out of the funds. Because direct property is illiquid, many providers kept a holding of cash and property shares to manage such redemptions. However, for some, this money ran out and many were in danger of becoming forced sellers of the buildings in their portfolio.

Forced sales risk a lower selling price and thereby penalise existing holders of the fund. In an attempt to prevent such redemptions and protect values, therefore, some funds imposed exit restrictions - including six month notice periods, giving their funds time to either accumulate the cash required or at least have the chance to sell on property at the right price.

So what do you do now? For investors who still have property holdings, fund prices do appear to have at least stabilised over the past couple of months. Many would suggest that now might be the worst time to sell out as analysts believe the market could be at the bottom – although a steady, bumpy ride to recovery is more likely than any quick turnaround so patience will be needed. Having said all that, it is up to each individual to decide why they hold property in the first place. If its diversification properties have not changed and there is no reason why it should not get back to its return profile, providing long-term yields, once this phase is over. Like any other asset class it will have its ups and downs over time – but this is exactly the reason why experts suggest you spread your portfolio around. Long-term, well diversified investors should be more than able to weather this storm.

Shirebrook Financial Services Ltd is authorised and regulated by the Financial Services Authority. The contents of this article do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before taking any decisions, we suggest you seek advice from a professional financial adviser. All figures and data contained within this document were correct at time of writing.

Overview of Property Investments

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