If you want to invest in property, you don’t have to buy a house to rent out, another option is to put some money into a commercial property fund, which invests in things like shops and office blocks. How do these funds work?
Q. What do property funds invest in?
A. Property funds invest in office blocks, shopping centres, car showrooms and so on. The idea is that you can invest in commercial property – costing tens or hundreds of millions of pounds – if you only have a relatively small amount of money.
Fund managers tend to look at several factors when choosing which properties to invest in, location is the main one but they also consider tenant demand for the property and whether there is much opportunity to improve income generated by open market rent reviews or increases in rent linked to inflation.
Q. Where does the return come from?
A. You should get a return from the rents that are paid (income) and – hopefully – from a rise in the price of the commercial property that the fund invests in. These funds are normally a good way of diversifying (spreading your risk). However, they are
Q. How much do you have to invest to put money into a property fund?
A. You can normally invest as little as £50 a month on a regular basis.
Q. Why have some funds stopped people from taking their money out?
A. The problem with property funds is that the asset they buy (commercial property) is very illiquid. What that means in English is that you can’t quickly or easily turn it into cash. If you invest in a share or bond-based fund, it’s normally pretty easy to cash in your investment. The fund will just sell some shares or bonds and give you your money back. The fund may not get the price it paid for them, but it’s easy to get the money back.
With a property fund, it could take months (or over a year) to sell an office block, car showroom or shop. If there’s no demand for office blocks in the area the fund is trying to sell, it could take even longer.
Over the last few weeks, but specifically since the Brexit vote, investors have been keen to take their money out. Normally these property funds allow investors to take money out daily. However, although they keep a cash buffer so they can pay investors who don’t want to keep their money in a fund, several funds are finding they don’t have enough cash. Because they can’t sell the properties they own in a hurry, they are stopping investors from taking their money out.
The other way that funds have discouraged people from cashing in their investments is by reducing the value of the fund. That means if you cash in now you’ll get less than you would before the reduction. The idea is that it’s a disincentive to cash in now.
Q. Which funds are affected?
A. This situation is changing almost daily so if you have invested in any commercial property funds, it might be worth checking what your fund is doing. Equally, just because a fund is included in this list as having cuts its valuation or temporarily stopped trading doesn’t necessarily mean that situation will continue for the long term. This is what has happened so far:
- Aberdeen Asset Management property fund – on July 7th it suspended trading in its UK property fund until July 11th. It cut the value of its fund by 17% on July 6th.
- Aviva – on July 4th it suspended all dealing in its Property Trust.
- Canada Life – suspended all dealing in its Property Fund.
- Columbia Threadneedle suspended trading in its UK Property Authorised Investment Fund (PAIF) on Wednesday at midday.
- F&C cut the price of its UK Property Fund by 5% on July 6th. It will review this valuation cut on an ‘ongoing basis’.
- Henderson suspended its UK Property PAIF on July 5th.
- Kames cut the price of its UK Property Income funds by 10% (it made an initial cut of 5% and a further cut of 5% on 7th July).
- Legal & General cut the value of its property fund by 5% and then by a further 10% on 6th
- M&G imposed a suspension on its UK Property Portfolio Fund on July 4th. It says it will review the suspension every 28 days.
- Standard Life – suspended trading in its UK Real Estate Fund on July 4th and said it would review the suspension every 28 days.
Q. Will I still receive income from these funds?
A. Yes, if you normally receive income from one of these property funds, it should be paid to you as before.
Q. Can I reinvest my income as I’ve been doing in the past?
A. No, if you previously reinvested your income, you’re unlikely to be able to do this during a period of suspension because no trading will be allowed. Your property fund should pay you your income as a cheque or a direct credit into your bank account until trading is resumed.
Q. Can I cancel my investment if I’ve started investing in one of these property funds in the last 30 days?
A. If you’ve invested in a property fund in the last 30 days, you should have a 30-day cooling-off period. If you’ve invested in a fund that’s temporarily suspended trading, you should still be able to cancel. Check with the property fund provider but it is your right to cancel within the cooling-off period. The same applies if you want to cancel your investment in a fund that’s cut its valuation, although you may have to accept a lower valuation.
Q. What happens if someone who’s invested in one of these funds dies. Can their executor cash in their investment?
A. I think it will depend on the property fund. Several say they will make payments to executors in special circumstances but I can’t guarantee that all will.
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