Property Funds Update 20 March 2020
- 20 March 2020
- 10 mins reading time
The necessary collective response to coronavirus COVID-19 has led to some of the sharpest falls in asset prices that we have seen in 30 years. This creates a particular challenge for property investment funds.
The challenges of valuing a property fund
When you invest in a property fund you buy units in that fund. In simple terms, the value of those units is calculated by dividing the total value of the fund’s assets (in this case, its underlying properties) by the number of units that exist. For property funds, this valuation is often concluded only after sufficient time has been allowed to calculate both rental and sale values.
In normal property market conditions, maintaining a fair unit price is tricky, during times of market turbulence it can become extremely difficult.
Property funds have suspended trading
The current dramatic falls in asset prices have led an increasing number of property valuers, such as Knight Frank and CBRE to conclude that it is not possible for them to make reliable judgements on valuations at the moment. This has led to several fund management firms having to suspend trading in their property funds until investors can be provided with accurate prices. Without informed prices of underlying assets, allowing the buying or selling of property fund units would be unfair to investors.
Property funds that have applied this suspension in recent days include those of:
Aberdeen Standard Life
Reasons not to panic
We experienced similar action by property funds in 2016 shortly after the vote to leave the European Union which drained confidence from the UK property market, sending property prices sharply lower. Within a few months the funds were trading again and managed to recover losses within a year. However, don’t forget that past performance is not a reliable indicator of future performance.
Since 2016, our analysis suggested that the prospects for sustained rises in property fund values had fallen. As a result, we have substantially reduced our allocation to property funds between 2016 and the end of 2019. This has been a positive move in the light of very recent market developments.
What we’re seeing now is a broad suspension of economic activity which has consequences for life and business everywhere. While it’s very challenging, and even tragic for some, we expect it to be a relatively short-term phenomenon. As life returns to normal over the coming weeks and months, so will business and, with it, we anticipate property funds to do the same.
Any views expressed are our in-house views as at the time of publishing.
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