Funds investing in direct property have been amongst the most popular products bought by retail investors so far this year.
Figures from the investment trade body the IMA show that a total of £2.9bn net new money flowed into funds in the IMA Property sector in the first nine months of this year.
Nearly triple the amount of money flowed into property funds than into all fixed income funds in that time, with the sector only marginally beaten by the combined might of the multi-asset Mixed Investment sectors.
While there are a large number of funds in the IMA Property sector that invest in property equities, the bulk of the money has been flowing into direct property funds.
These are funds that buy up office blocks or commercial real estate and then deliver returns for unitholders through a combination of the yield paid to the manager by the users of the building, as well as any capital appreciation of the buildings’’ value.
The reason for the sudden increase in the popularity of the property funds comes down to a combination of the solid yield on offer with base rates still at record lows, and the sudden increase in capital appreciation on the properties.
This uptick in the value of direct properties has seen most direct funds deliver returns of more than 10 per cent in the past year with some even nudging 20 per cent, a significantly above average return for a direct property fund.
‘Hot’ money
The super-normal returns have led some to fear that a large part of the money flowing into the sector may be so-called “hot money” that will leave as soon as this period of capital appreciation ends.
The first asset manager to acknowledge the potential problems of this sudden inflow of money has been Threadneedle. The group’s UK Property fund, run by Don Jordison, has nearly doubled in size so far this year, rising from £447m of assets at the start of the year to more than 850m now.
And the firm has started to become worried by all of this new money. As a result it has it is “monitoring the liquidity” of the fund in order to “protect our existing clients’ interests”.
The firm is understood to have ceased marketing the fund in an attempt to stem inflows, though it has yet to officially “soft-close” the fund.
As well as the risk of “hot money” flowing out of the sector at some point, the managers of some of the top-performing property funds have raised concerns about the sheer amount of money chasing a limited number of direct property assets, leading many managers to make “off-market” deals or invest in unconventional property assets.
Gerry Ferguson, manager of the £3.2bn Swip Property Trust, notes: “Given the strength of the market in recent months there are certainly fewer attractively priced properties that meet our quality criteria”
