Property funds have seen nearly half a billion pounds invested in the month of May – the highest sales since December 2009. According to the latest figures from the Investment Management Association (IMA) funds under management hit an all-time high in May 2014 totalling £801 billion across all sectors.
“Equities continued to lead the way with UK Equity Income and Global in the top five top-selling IMA sectors. But Property also received a big slice of investors’ funds and topped the IMA sector table for the first time since January 2010,” said Daniel Godfrey, IMA chief executive.
Property was the second most popular asset class with £491 million invested, the highest since December 2009 when net retail sales were £519 million.
The attractive yield and potential diversification appeal to investors, but Mark Dampier of stockbroker Hargreaves Lansdown warned investors not to be blind to the dangers.
“Stamp duty alone is 7%. Investors should think of how much it costs to move house – commercial property trading faces similar charges. Stamp duty, legal fees, surveys, plus it’s illiquid,” he warned.
“Investors are using commercial property funds as a proxy for bonds. They have been scared off bonds by low yields and rumours about illiquidity – but commercial property is just as illiquid as corporate bonds.”
Investors may be excited by the growth seen in the residential property market and keen to up their exposure to the asset class, but they should be aware there is not perfect correlation between the types of property. The latest Nationwide House Price Index revealed that over the last year the average property in London has increased an incredible 26%, while the average increase for the UK as a whole is 11.8%.
“The price of a typical property in London reached the £400,000 mark for the first time, with prices in the capital now around 30% above their 2007 highs and more than twice the level prevailing in the rest of the UK when London is excluded. In the UK as a whole, prices are less than 1% above their pre-crisis peak. Excluding London they are 0.4% below peak,” said Robert Gardner, Nationwide's chief economist.
While these residential property prices are impressive – and a little concerning – there is a disconnect between this rise and commercial property funds. The popular Ignis UK Property fund has only increased 10% over the past year.
“Commerical property may be ok if you can buy one great quality building and own it – fully occupied – for 20 years. That would be an impressive yield for little cost,” said Dampier. But the problem is with open-end funds, invariably the flows will be against you and as 2008 proved, it is not actually a diversifier.”
