It was a dark day for property fund managers on the 23rd of June last year, when the votes came in and it was official that the United Kingdom wanted to leave the European Union.
The vote sent many property fund managers into panic mode as scores of property investors did not hold their nerve and scrambled to get their money withdrawn from the open-ended property funds, as the notion that UK property prices would plummet like a stone.
Amongst the affected were seven of the largest open-ended funds with an estimated 15 billion GBP of investor’s capital, halted trading as worries that they did not have the cash flow to pay back all their investor’s.
As is usual in a situation like this people started to compare what was happening to the great financial crash of 2008.
There was some backlash from the Brexit decision but in the main fears were unfounded, as the UK property sector regained its composure towards the end of 2016 and the beginning of 2017, and any funds that had ceased trading opened up their doors again.
This unfortunate set of circumstances opened pandora’s box, and begged the question, are open-ended funds suitable for investments such as physical commercial property, that can’t be sold in a hurry.
Investors are able to withdraw capital on a daily basis if they so wish, regardless of the fact that it can take weeks and even months to sell the property investments that fund consists of.
In normal circumstances this is not a problem as the fund managers account for this and hold a certain proportion of the assets as liquid cash, but if there is a major scare and redemption is needed on an unprecendented scale, problems will arise.
The Financial Conduct Authority took notice of the Brexit situation and the unexpected ramification on open-ended property funds, and now in the middle of reviewing the way open-ended property funds work, to see if improvements can be made.
Property funds known as closed-ended property investment trusts do not have such problems. The have level of capital is fixed and the investor is issued shares, so when an investor wants to leave a fund, they have to sell their shares.
So in a situation like Brexit it makes financial sense to hold onto the shares to get the best possible price, it is also the ideal time to invest and pick up more shares while the getting is good, and the price is in their favor.
Closed-ended UK property funds typical outperform their open-ended counterpart over longer periods. Over five years the average investment company total return of 87.4% compares with an average of 52% from open-ended funds.
The need for open-ended funds to hold onto more liquid cash limits their investment ability, thus limiting their returns.
Closed-ended funds can invest more of investors’ money in property.
The general consensus amongst property experts is that annual total returns from property will average 5.2% over the next five years.
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