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Managers wary as investors pile into property funds

UK investors have ploughed £5 billion into property funds over the last 12 months, and some fund managers argue they could be in for a shock.

 
Managers wary as investors pile into property funds

Property is one of the most popular alternative asset classes, but the strength of enthusiasm for it, from both retail and institutional investors, is starting to make some fund managers nervous.

Citywire A-rated Gary Potter, co-head of multi-manager at F&C Investments, is alarmed by the amount of money that has poured into the sector this year and warns there is the potential of a bubble forming that will ultimately burst.

‘It’s a viable sector and there’s always money to be made in property but the investing public have taken a fairly straightforward asset class and ramped it up because they don’t like equities or bonds,’ he said.

More than £5 billion has been ploughed into property funds over the past 12 months, according to an analysis of Investment Association data. At the last count there was £26.5 billion invested in this area, equating to 2.7% of UK assets under management.

A sudden deterioration in the global economic backdrop or a substantial interest rate hike could leave investors dangerously exposed. Adding to the general feeling of unease is the concern that retail investors may have become too heavily exposed to property within their overall investment portfolios, especially when their own homes and buy-to-let holdings are taken into account.

Diluting exposure

Nick Samouilhan, senior fund manager in the multi-asset team at Aviva Investors, said property was one of his favoured positions last year because it offered an attractive yield, particularly compared with government bonds.

‘We don’t dislike the asset class but feel returns going forward will probably be less than they have been recently,’ he said. ‘[We are] using cashflows into our funds to dilute that [property] exposure.’

Property has done well in recent years with the annual IPD UK Annual Property Index showing impressive returns of 17.8% for 2014, up from 10.7% the previous year and 3.4% in 2012. It lost 22.1% in 2008.

Source: Lipper

Running out of steam

Property fund managers are predictably more optimistic, although they warn there is less chance of making serious short-term returns. Matt Jarvis, manager of Legal & General UK Property , suggests the market may run out of steam by the end of 2016.

‘For long-term investors prepared to see it as a diversification tool to other asset classes, the case remains,’ he said. ‘It’s less the case for those with short-term horizons because values have moved forward significantly.’

Although there have been some strong performances from these markets over the past few years, Gerry Ferguson, manager of the Aberdeen Property Trust , has become more cautious in his approach. As well as selling some of his higher risk holdings, he has been investing in more sustainable income assets such as student accommodation and some retail. These, he suggests, benefit from being longer term, stable positions.

‘There is also a sense of keeping our powder dry should opportunities arise and there is a hiccup in the market,’ he said. ‘We’ve had three really strong years for property and I think the momentum is still there, but we’re a big fund and we have to think long term.’

1 comment so far. Why not have your say?

sgjhaghsdg

Oct 08, 2015 at 16:34

I've been heavy on property and infrastructure for a few years now, but am now thinking about reducing in a pretty big way. The thundering herd is running away from EM and diggers, so they're probably going to get an overweight.

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