Taking Account
  • Taking Account

Storm Subsides on Commercial Property Funds

Autumn 2007

Until very recently, property funds were the most poular sector for unit trusts and open-ended investment company (OEICs) investors. Then in July 2007, a sudden squall hit. Funds investing directly in commercial property experienced a net outflow of cash, and this forced them to change the valuation basis on which their fund prices were calculated. The end result for many of these funds was that a trend of steadily rising prices was broken with a sudden drop of about 5%. The same pattern was applied to life and pension property funds.

The falls in fund prices prompted some "Shock Horror!" headlines in parts of the national press, with suggestions that small investors had been sucked in at the top of the market. If you have invested in property funds recently and have been worried by some of what you have read this summer, you may take comfort from the following:

  • After a very strong performance over the past few years, the property market is now cooling down, but in our opinion is not crashing.
  • The case for including commercial property in a balanced portfolio remains sound. As if to underline the point, in June 2007 the Associations of Private Client Investment Managers added a 5% commercial property element to its three model private client portfolios.
  • Some funds are now once again experiencing net inflows from investors and their prices have risen to reflect this. Perhaps predictably, the press has not made banner headlines of the 5% fund price increases (FTSE/APCIM Indices, May 2007).
  • Directly invested property funds are generally much less volatile than their equity counterparts. The turmoil in world stock markets during July and August this year were a timely reminder of this.
  • If you have individual savings accounts (ISAs) or personal equity plans (PEPs) linked to directly invested property funds, you may well benefit from a tax change proposed by the government and due to be introduced next April. The net effect of this could be to remove the 20% non-reclaimable tax which currently applies to the fund's rental income.

Commercial property is not a get-rich-quick, short term investment and you should not treat funds which invest in it as such. If nothing else, the 4% stamp duty that applies to virtually all commercial property transactions is a serious obstacle to speculative profits. The role of commercial property is, like shares, that of a long term investment which can potentially generate both capital gains and a rising income.

The value of property investments and the income from then can fall as well as rise and you may not get back the amount originally invested. Past performance is not a reliable indicator of future results. The property sector is specialist and can be volatile in adverse market conditions and there could be delays in realising the investment. The value of a property is generally a matter of a valuer's opinion rather than fact. Tax treatment depends on your individual circumstances and may be subject to change in future.

Hilton Sharp & Clarke