Property funds are among the most popular alternative methods of investing in property. Usually, they are also considered among the most robust thanks to the role of professional fund managers and the diversity of their portfolios.
However, since the UK voted to leave the EU the economy has been suffering a profound shock effect. Property funds have proved far from immune, tumbling in value and making some fairly negative headlines. On the whole, however, many investors are simply unsure what is really happening with them. This is not surprising, as the situation is not a straightforward one.
Perhaps the most prominent of the negative headlines have come from open-ended funds. These are funds where people’s investments directly reflect the value of the portfolio, and when funds are fully invested more shares can be created and sold in order to generate more money. In these funds, people’s investment is directly used for property purchasing, though a cash buffer is also kept to accommodate those who wish to buy out without the need to sell property.
The referendum result led to a large number of people wanting to exit these funds, with the result that many used up their cash buffers quickly. Due to the slow process of selling a property and unfavourable negotiating positions, this led many such funds to instigate lock-ins and prevent people from leaving for a time until either the cash can be generated from property sales or things pick up. Still others have been forced to give their investors an unattractive choice, either accepting a lock-in or selling their share in the trust at a heavily discounted price.
Investors who are now trapped in these funds may be relieved to hear that forecasts for the property market after the initial shock has ended are more positive than those for many other markets. Some investors who are happy to accept a slightly higher risk profile in the pursuit of better returns are even hoping that this will lead to bargain buy-ins when the funds reopen.
Exchange-traded Real Estate Investment Trusts (REITs) are in a somewhat different position. These funds sell a finite number of shares, traded on stock exchanges like any other company. As such, the value of shares does not directly reflect the value of their portfolios.
These funds have also experienced a marked sell-off of shares thanks to investors losing confidence after the announcement that the UK had voted to leave the European Union. This caused the value of their shares to tumble, falling much more than the value of their portfolios. This is leading many speculative investors – again, those happy with a higher risk profile – to see an opportunity to buy in at bargain prices and then benefit when shares correct themselves to be more in line with the actual value of these funds and their assets.