We all know that the present situation is unprecedented and there are lots of changes we are all experiencing, many for the very first time.
We are all aware of the health and hygiene challenges and many people and companies are facing extreme financial pressure of which there are many signs – with the human factor being recognised in stats such as claims in Universal Credit increasing 10 fold.
The market for stocks and shares of course is no exception to these challenges with the FTSE100, one of the most recognised measures for how shares in UK companies are doing, initially losing 34% of its value and then increasing by 17%* in another extraordinarily short period – a rate of increase rarely seen.
The volatility of the worldwide shares market is viewed largely to be very different from the last worldwide crash in 2008. Not just because of its cause (which is probably less complicated, but more catastrophic), but also because in the UK our public borrowing is lower and experience greater.
However many Property Funds had to close to withdrawals in 2008 as they have now and this is partially because ascertaining the true value of property at times like this is difficult, but also because of withdrawals or ‘perceived’ withdrawals.
We say perceived because the closure of property funds is usually a proactive measure and can be instigated in case there are a large amount of withdrawals that the fund doesn’t have the cash to meet.
Why do property funds do this? – Most (but not all) property funds mainly contain commercial property, this means properties such as offices, retail parks, shopping centres, leisure centres etc. and commercial property (or any property for that matter) is ‘illiquid’ which basically means it’s value cannot easily be realised and turned into cash. This means that property assets are literally tied up in bricks and mortar – or probably more likely steel and glass. Many of us will know from personal experience releasing the money you hold in property takes time. If withdrawals are in excess of the cash held then property has to be sold and property funds, typically hold less than 10%** of their total value in cash. So if withdrawals above 10% are sought by investors the only way the fund could cover these requests is to sell property assets which means market value of the property needs assessing, buyers need to be found (not an easy task in the present post Covid times one would expect), contracts agreed and completed, final transfer of the asset concluded (at a mutually convenient time) and funds cleared into bank accounts. Anyone that has sold a house will know that agreeing completion dates and actually exchanging contracts to effectively ‘seal the deal’ can be both a painful and drawn out process, rarely achieving its first scheduled date.
Realising the value from property assets in property funds is no different, hence why all funds include the ability to close to, or delay withdrawals during periods of uncertainty, or when they expect there may be extraordinary withdrawals requested which would be above the cash content of the fund.
Valuing property accurately now would also be extremely difficult, who is available and willing to buy? What is the timing of the UK coming out of this unknown and never experienced before situation? What affect (if any) does it have on property prices in a ‘normal’ market? – These are all questions that would need answering and are probably too uncertain at this time to be able to do so, in which case the true value of each asset and therefore the fund overall is virtually impossible to determine.
We also need to remember that this action is taken to protect all investors, otherwise it could become a race to see who can get in the queue to exit first, or even worse a ‘fire sale’ which means that the funds are under extreme pressure to sell and therefore real value isn’t realised and this would mean that all investors lose out.
However commercial property remains an important asset class in any long term savings plan, historically it doesn’t closely follow the trends and changes seen in other assets such as cash, fixed interest or equities and therefore would usually be included in any properly diversified portfolio designed to use a range of different assets to ensure long term growth.
You should note that at the time of writing most major pension providers have restricted access to their pure property funds at this time and in the short term we would expect to see this trend continue. If you are invested in a property fund that is closed you should have received correspondence from your provider and there will be a pre-determined period in the small print which details how access to your fund can be restricted, typically 6 to 12 months being the maximum.
It is important to note that the value of investments can fall as well as rise. This means that you could get back less than you have invested.
This article should not be construed as advice, so if you’re not sure if an investment is right for you, please seek advice from a suitably qualified financial adviser. If you do not have an adviser then please feel free to contact us at 020 3869 6900
* Source Corporate adviser 140420
**Source: FT report on Moody’s findings 16/12/19