Is it time to stop investing in commercial property?
If you're worried by the turmoil in the markets, James Daley has some advice
Saturday 26 January 2008
Investors in the commercial property sector have been suffering from a crisis of confidence over the past few months, rushing to cash in their investments after seeing sharp falls in their value.
To make matters worse, several of the country's largest funds have subsequently been forced to close their doors to withdrawals for three, six, or even 12 months – raising the state of panic amongst investors to even higher levels.
This week, it was the turn of Scottish Widows to impose a six-month delay on requests for withdrawals from its life and pensions commercial property funds, following in the footsteps of Scottish Equitable, who only days before had stopped some of its clients transferring out of their property funds for a whole year. Friends Provident has also imposed a six-month deferral period, and other pension providers may well follow.
Perhaps understandably, nothing gets investors more frenzied than being told that they can't do what they want with their own cash. However, in the case of commercial property funds, customers can take comfort in the fact that the deferral periods are nothing sinister. They have been put in place to protect the cooler-headed investors who are content to sit tight and watch the storm blow over.
Unlike equity or bond funds, property funds are not able to dispose of their assets at a moment's notice. While all property funds keep a proportion of their money invested in liquid assets – so they can return investors' money whenever they want it – these reserves have been depleted in recent months as large numbers of clients have attempted to cash in their investments at once.
As a result, the funds are now faced with the choice of either selling properties as quickly as possible – almost certainly guaranteeing they receive less than they are worth – or telling investors that they will have to wait for their money.
By taking the latter option, the funds preserve value for the clients who remain invested.
In the three cases that affect private investors so far – Friends Provident, Scottish Equitable and Scottish Widows – the vast majority of money held in the funds is part of people's pensions. As a result, they can't get their hands on it until they are past 55 anyway, and most will not cash in their pension until much later.
The remaining customers are generally those who hold property within life insurance funds, or unit-linked bonds, both of which are long-term contracts.
Darius McDermott of Chelsea Financial Services, the independent advisers, says long-term investors should all sit tight and not panic. "Why would you want to cash in at a 20 per cent loss?" he says. "Commercial property has already fallen a long way. Do I think it could continue falling? Yes, it could all get worse over the next six months, and you could lose another 5 per cent. But is it going to go down another 20 per cent? I don't think so."
If you've got more short-term savings invested in commercial property, however, it may be worth reviewing your portfolio. Large numbers of investors have put retail funds, such as those run by New Star and Norwich Union, into their ISAs over the past few years and Mark Dampier of Hargreaves Lansdown, the independent adviser and broker, says some now have far too much exposure to the asset class.
If you are likely to need to get your hands on any of your money within the next year, it may now be worth switching it out of property in case your fund also becomes subject to a deferral on withdrawals.
It's worth remembering, however, that due to pricing restrictions imposed on these funds at the moment, you will have to cash in your units at a significant discount, adding further to any losses you have made while invested in the fund. So, if you don't need to move your money, it makes sense not to.
McDermott says investors should typically have around 10 per cent of their total portfolio invested in property, to act as a diversifier. Given that its returns are uncorrelated with the equity and bond markets, it should provide some support for your portfolio when other parts of it are falling.
While commercial property was returning around 18 per cent a year between 2004 and 2006, McDermott points out that this was highly irregular, adding that the recent correction was only to be expected. Historically, the asset class has returned around 7 per cent a year – above cash and bonds, but less than equities.
Unless you're a sophisticated investor, it makes good sense to seek professional financial advice on where to invest your money.
To find an independent financial adviser in your area, visit www.unbiased.co.uk.
Questions Of Cash: 'Your bank card may have been cloned'
Government's Pension Wise guidance service is up and running
Bargain Hunter: BT improves its mobile reception with 'incredibly competitive' deals
Mark Dampier: What price equities when cost cutting does nothing for profits?
Offset your mortgage and save thousands
- 1 Finland schools: Subjects scrapped and replaced with 'topics' as country reforms its education system
- 2 The West has it totally wrong on Lee Kuan Yew
- 3 #FreeTheNipple: Women in Iceland bare breasts in solidarity with trolled student
- 4 Scientists have discovered a simple way to cook rice that dramatically cuts the calories
- 5 Zayn Malik quits One Direction: Hundreds of workers request compassionate leave following band member's exit
Nigel Farage brands LGBT activists 'filth' and 'scum' and accuses them of scaring away his children after they invade his local pub
Ukip supporters are 55 or older, white and socially conservative, finds British Social Attitudes Report
JK Rowling responds to fan tweeting she 'can't see' Dumbledore being gay
Russia threatens Denmark with nuclear weapons if it tries to join Nato defence shield
Jeremy Clarkson sacked live: Alan Yentob 'wouldn't rule out' ex Top Gear host's BBC return
Germanwings plane crash live: Co-pilot Andreas Lubitz wanted to 'do something people would remember him for'
iJobs Money & Business
Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...
Negotiable: Recruitment Genius: You will be the first point of contact for all...
£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...
£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...
Day In a Page
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station