Many property funds inside our pensions and investments have suspended trading during the coronavirus pandemic and lockdown.
Why are property funds suspended?
Fund managers suspend funds to protect them from ‘runs’ on the fund. For example, with coronavirus lockdown, many businesses have been forced to close meaning they have little or no revenue, meaning they may not pay their rents. This results in potential reduced liquidity in a property fund meaning it is difficult for the fund manager to allow full or partial withdrawals or switches from a fund. The very nature of a commercial property fund is that it is owns large amounts of bricks, mortar real estate that is not easily sold and in most cases, the fund manager does not want to sell it.
Fund managers prefer to keep good quality property with blue chip tenants and high rental yields rather than be forced to sell and lose the rental yield.
The future for property funds in suspension:
We have conducted our own research into the quality of property funds. Many of the big name brand ‘super tanker’ property funds hold, as expected, good quality property, blue chip tenants with upward only rental reviews and high rental yields. Fund managers admit they have seen in a fall in rents paid during lockdown but equally they are seeing strong resilience in other sectors. For example, we have seen figures where industrial units are still paying 80% of rents, office units paying 70% of rents and it is only when you get down to leisure where rents collected have fallen to 15%. Most super tanker property funds do not carry that much exposure to leisure property and therefore the rents received are up in the 60-70% overall.
Looking at the bigger picture, if the rental income yield is usually around 10% or market value, then a fall to 6% still means the fund is generating an income of 6%pa gross. Compare that to 0.01%pa in your bank account.
Most property fund managers are confident for the future, many have built up cash reserves or have cash parked’ funds of between 20% and 30% of the fund meaning that they are well placed to ride out the coronavirus lockdown as well as any subsequent recession.
In fact, long term, by sitting on large cash reserves, they are well place to take advantage of further quality property acquisition when the opportunity presents.
If you wish to get out of commercial property in the short term, then you may need to wait, if like us personally, you are on a medium or longer term growth target, then whilst you may see falls in your property funds over the next year or so, you may see some long term, strong growth as the economy comes out of recession.