Property funds have been a mainstay of the UK’s retail investment landscape for decades, with some of the most popular funds launched back in the noughties.
Designed to meet the demand for open-ended investment company (Oeic) structures from advisers and clients, they offered an alternative to the range of long-established property trusts already available.
Problems first arose with the funds following the credit crunch.
With swathes of the sector suddenly seeing a fall in commercial property values, investors sitting on lofty gains ran for the exit - only to see they couldn’t leave the building.
The issue they faced then, and as is the case now, was that property funds invest in illiquid assets which take time to sell.
Like all Oeics, the funds can suspend redemptions. This gives the managers time to sell a property to meet redemption demands.
Doing this helps to protect the fund from having to rush any sales, and allows managers to negotiate the best price possible, protecting all their investors.
This happened then, and once again in the wake of the Brexit vote in 2016, as investors panicked about the foundations of the UK property market.
Most recently the huge uncertainty surrounding the coronavirus – not to mention the inability of valuers to actually go and assess properties due to lockdown – has prompted another suspension of the sector.
Most of the major funds are currently closed to redemptions, locking up billions of pounds of investors’ money.
These past events suggest advisers should steer clear of this sector for clients. However, it's not that clear cut.
The case for open-ended property funds
Property is a useful diversifier for clients’ portfolios.
It offers a source of income at a time when income is increasingly scare amid the dividend cuts we've seen of late.
Yet it's also an alternative risk/reward profile to other asset classes.
Advisers can gain exposure to the sector in other ways of course, including via an investment trust, and these provide daily, equity-like liquidity to the sector instead.
However, listed property funds are no panacea, because if the property market tanks, investors who sell will lose money.
While they are able to sell, that can encourage knee-jerk reactions which run counter to the whole point of long-term investing, and often sees people selling at the worst possible time.
The real point is if clients are comfortable with the fact there'll be spells when Oeic funds are illiquid, then they still have a place in portfolios.
After so many incidents in the last decade involving property funds, most investors should be comfortable with the structure of open-ended property funds, and the specific way they trade.
It then comes down to a simple question for the adviser: does my client need daily liquidity across their portfolio?
The fact is, very few advised clients will need that, especially when they are in the growth phase of their life and trying to amass as much as possible in their pensions and investments.
So perhaps an illiquid structure for property funds, rather than being seen as the wrong option, can actually be the right one – one which encourages long-term investment.
Investors would be forgiven for expecting to be able to access their money from equity funds structured as Oeics at any time.
But as long as they approach property funds with the mindset that it is a truly long-term position, the issue over whether they dip and subsequently gate in times of increased volatility should be by-the-by.
There will be some people who simply can't stand the idea that they cannot access their money at all times.
But then that becomes more a question of whether they should invest at all, rather than what they actually hold.
For everyone else, these funds can have a place in portfolios to provide a specific type of return.