6946 what a difference a year makes year 2009 month 12 itemid 127

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What A Difference A Year Makes

Written by Paul Amery

  
December 02, 2009 08:55 (CET)

The property sector recorded £367.6 million of net retail sales in October, the newspaper reports – the highest since May 2007 – while property funds have now seen net inflows for seven consecutive months.

Incidentally, the Telegraph also notes that gross sales of ISAs – mutual funds bought under a tax-protected “wrapper” – hit their highest ever October total and the highest monthly total outside the “ISA season” (when people normally top up their funds in the spring each year) since June 2000.

But, as far as property is concerned, what’s going on? It’s only a few weeks, after all, since one of the largest sector funds removed restrictions on investor withdrawals, an emergency measure taken in January this year in response to panic selling.

And, as the Telegraph’s Paul Farrow reminds us, “tens of thousands of investors were persuaded to buy into commercial property at inflated values in 2006 and 2007, only for prices to come crashing down. Many funds fell in value by more than 40%.”

Investors in property ETFs have had an even tougher time.

Someone who invested in the iShares FTSE EPRA/NAREIT UK property ETF in early 2007 would have lost over 80% of their money by March this year, when the ETF fell to below £2 a share. Since then its price has more or less doubled, although it’s currently below its best levels of recent weeks.

Here, it’s worth remembering the key difference between property ETFs and the property funds of the type referred to in the Telegraph article.

Property ETFs invest only in listed securities (property companies and real estate investment trusts), whereas the IMA property sector includes both funds investing directly in commercial properties, and those investing in property-related securities.

With property ETFs you get increased volatility but guaranteed liquidity at any time; with the unit trusts that the IMA includes in its survey your returns are probably going to be smoother, but the whole valuation process is more subjective for those funds investing directly in properties and, as we’ve recently seen, you are liable to face total illiquidity in the case of a market slump.

Are we past the worst for the sector?

As a recent commentator in London’s Evening Standard notes, one of the prime reasons for the recovery in commercial UK property in the second half of 2009 is the lengthy rally in share prices. Investors have diversified from rising equity markets into an asset class traditionally seen as less volatile (if you can get out when you want to, that is).

Others point to the fragility of the property sector recovery, arguing that there can be no return to sustained rental growth without a broad economic rebound and that the current price spike is more akin to a bubble, based on cheap borrowing and huge fiscal stimulus.

In another Standard article, Andy Brough of fund manager Schroders argues that rents are falling as longer commercial leases come to an end, while the halcyon days for property investors of upward-only rent reviews may be over.

All in all, the current situation seems particularly unstable. On the one hand, funds are flush with cash and are outbidding each other to acquire new properties; on the other, overcapacity is rife and the security of rental income seems lower than at any time in decades.

For me, seeing large retail investor flows into the sector (typically a contrarian indicator) tip the balance in favour of the bears. Hold on for a tough ride in 2010, property investors…

 

 

 

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