With 3 institutions (so far) suspending dealings in their commercial property funds, the downside of investing in such funds has emerged.
The past few years have been very good for such investors (and fund managers), but now that share prices of quoted property companies are on the slide it might make more sense to invest in professionally-managed property companies (propco) rather than buying what is basically a product of the financial services industry. An advantage of shares in propcos is that shares can normally be liquidated during daily market trading hours, any loss the bid price at the time. With property funds, liquidity, beyond the amount of loose change for occasional redemptions, is dependent upon the sale of the physical asset.
Amongst the players in the institutional property market are the very funds that are currently in suspension. Amongst the firms of valuation surveyors whose opinions maintain the net asset value for the property funds are the same firms that value the propco portfolios. It’s a cosy club.
For some time now, I have been warning of overvaluation and disconnection between capital valuation pricing and underlying rental growth. Lone voice(s) in the wilderness cut no ice. Valuation surveyors, a law unto themselves, having decided that auction prices are representative even though they’re not, have continued relentlessly to interpret the market in such a way as to increase or at least maintain the NAVs for propcos and funds. Whether any surveyors were privately concerned that the market was overheating is possibly something we shall never know: arguably, if valuation surveyors were to go out on a limb en-masse then their clients would be miffed. In the property game of musical chairs, where drinks are flowing and everyone is given the run-around, the fun isn’t sitting down as soon as the music starts, but seconds before it stops.
Now that Brexit has been a shock to all but the forward-thinking, what better way to any feeling over whether valuations are sustainable than cite as a plausible reason the uncertainty that Brexit is causing? Keeping up appearances, giving the impression that things are only to be expected, is the stuff of confidence. Which is why if you’re going to get involved in their system it is necessary, at least in my opinion, to remember that although it’s your money that is being gambled with, it is best for all concerned to believe that the investments have been carefully chosen.
In my opinion, the test of whether an investment is a winner is that it grows in value come what may. There are never going to be many winners, but that doesn’t stop those that don’t quite have what it takes to be discerning from thinking every player has an equal chance. It is at times like these when yields from property start to go back up to norm that one realises just how distorted and overpriced the market has become.
Whether property fund or propco, a property is an illiquid asset. Illiquid assets are hard to liquidate. Just because there are or have been wads of cash washing around the system and swathes of relatively inexperienced buyers whose only real skill is how to convince a bank to loan or a property fund whose marketing for investor cash is convincing doesn’t mean that every property is going to be a winner. Most of them are likely to under-perform. Heigh ho, it’s only to be expected.
And what of growth prospects? Apart from blips in stocks and shares, as traders nip in and out, the disconnection between capital pricing and underlying rental growth would in an orderly market mean that gradually as valuations ease the gap would close. But that presupposes an existence of underlying rental growth. What happens if rents also fall. Not I hasten to add across the board, but of the sort of property that diggers and dreamers thrive on. Might the difference between prime and secondary propositions, a difference that has been eroded by low interest rates and falling yields, also make a come-back?
Investors in property funds can look after themselves, they might have to. I reckon that anyone that has paid around 5% for a property that in the past would’ve have been pitched at 10% is also gong to feel the pinch.