Property Funds Struggle to Find Investment Opportunities

Property fund managers have been raising their cash allocation, partly to reduce liquidity risks but primarily because of a lack of attractive investment opportunities

Simon Molica 25 May, 2017 | 2:08PM

Property and fundamentals are rarely put in the same sentence. Unlike most other asset classes, property is seen to be underpinned by esoteric demand that renders fundamental metrics - such as rental yield and debt to income ratios - worthless.

Yet, one cannot move away from the longer-term reality. Property cannot increase at a rate that exceeds its fundamental baseline forever. Either the prices must fall to reflect the fundamentals, or the fundamental baseline catches up via rental growth, population growth, wage growth, interest rate cuts or any other fundamental factor.

The stark reality is that property growth and fundamentals have to be linked in the very long-run and this is the challenge many property managers are said to be grappling with today. After decades of enjoying a tailwind to returns, the wind has seemingly stopped. This has seen many managers concentrating on raising their cash allocation even further, partly to reduce liquidity risks but primarily because of a lack of attractive investment opportunities.

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About Author

Simon Molica

Simon Molica  is a portfolio manager for Morningstar Investment Management

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