Commercial Property Funds Up Cash Holdings

Commerical property funds have benefited from QE and low interest rates, and even bounced since Brexit. But the outlook is now more muted, warns Simon Molica

Simon Molica 4 May, 2017 | 12:51AM
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Simon Molica: Today I'd like to speak about a well-publicized sector and that is U.K. commercial property. To summarise where we've been and where we're going, we'd look at the Global Financial Crisis where capital values fell by 40%. Since then we've had a startling recovery in the asset class and that really is buoyed by QE and a low interest rate cycle.

We've had a recovery of about 120% since then. Now, during Brexit there was a bit of weakness in that month and that really was about 2% to 3% fall in capital values. Whereas since August 2016 we've had a recovery again and that's been in the region of about 5%.

I think a notable factor that we've seen recently is how much the U.K. property fund managers running retail funds have actually increased their cash allocation recently. During around the mid time of 2016, we saw cash of around 10% to 15% in most fund managers' portfolios. Now, I'd say it's more like 20% to 25% and that really is quite an increase.

And I think that tells us two things. One, managers are still worried about that liquidity risk, but actually two, it could possibly also a feature that they're worried is an overheated market and i.e., not going to get much return from capital growth.

 

Where that leaves us today is that actually fund managers are going to be looking for much more returns coming from income and active asset management to enhance returns going forward and not necessarily capital growth. And therefore, I think I'd align that with investor expectations that they too should also not expect a lot of capital growth coming from the sector but actually more in line with an income objective.

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Simon Molica

Simon Molica  is a portfolio manager for Morningstar Investment Management