UK Commercial Property Funds

Since the Brexit result UK property has been one of the worst performing sectors.

Firstly I would caution a steady hand at these times. There is plenty of demand for these assets and the Pound is now at a level which will attract overseas investors in my view.

There has been a lot in the papers this week about Unit Trust Property funds stopping holders being able to sell their holdings so what is going on?

CFM does not invest in Unit Trust commercial property funds. We invest in Commercial Property but we only do so through INVESTMENT TRUSTS which are far more reliable.

How do Unit Trusts work?

One single firm runs and operates a Unit Trust. They do this by creating units when new investors wish to buy into the fund. They take the investors money at that point and in the days and months ahead invest the clients money into the asset the fund is meant to invest in.

Selling the Unit Trust Holding

What happens when the client wants to sell? The firm that operates the Unit Trust, is required to return the clients money to him at its current value. What happens with property? If one client who invests £5000 into the fund wants his money back the firm in theory sells the underlying, receives cash from who ever buys the underlying investment and then gives it back to the client.

If you think about the process involved in buying and selling property this process is not easy and can take time. So if as is happening now lots of investors are trying to redeem their units in property unit trusts there can be a problem. How does the company running the UNIT TRUST sell an office block quickly? The answer is that it either can not do so or it can do so at a very low price and both of these are happening now. Property is being revalued to take account of possible fire-sales of assets as investors get frightened becasue they can’t sell. This tale should also act as a lesson for advisers who think Property is a staple area to invest in and have negated to recall that it is illiquid.

Unit Trusts and property. In my view property should not be sold within a Unitised product. Or at least not marketed in such a way that investors assume they can get their money back quickly if they want it.

Investment Trusts 

The difference with investment trusts is that they are closed end. They issue a fixed amount of shares and operate as a company issuing shares. If one holder wants to sell their shares then they go to the stock market via a broker and effectively put them up for sale. At a time like this a buyer may drive a hard bargain and perhaps be able to buy those shares at a price which is below the tangible net asset value of that share. However the point is that the seller CAN sell his shares to someone in the market and there is no delay. UNIT TRUSTS CAN NOT do this. They have to sell the underlying assets. Therefore there is more a less always a price for shares in an investment trust which has value. For this reason it is far more sensible to buy commercial property via Investment Trusts. You will not fall foul of holding a Unitised product that you can not sell.

CFM

If you or friends have holdings in these Unit Trusts and need advice then give us a call and we will discuss your options. Or email info@capitalfinancialmarkets.co.uk

Paul Coffin