Commercial property

Here’s a controversial argument to make right now: commercial property funds can make very good investments. Easy for you to say; financial advisers with clients locked into “gated” property funds, might complain, as they wonder when investors might once again get access to their money. Still, it’s the truth.

Where else, right now, will income seekers find an asset class yielding 3-4 per cent a year (and more like 5 per cent a year over the long term if the past 30 years are any guide)? And where else is there the prospect of long-term capital gains underpinned by tangible, physical assets?

All of which will be cold comfort to investors with billions of pounds stuck in open-ended commercial property funds that have shut their doors to withdrawals. They’ve been caught out by the sudden spike in negative sentiment in the sector following the Brexit vote. With many investors selling out of these funds, the managers have burnt through the cash buffers they maintain to meet redemptions; to fund further withdrawals, they would have to start selling assets, which isn’t so easy if you’re talking about warehouses, shopping centres, offices and so on. Hence the closures.

The point here, however, isn’t that commercial property has all of a sudden become a bad investment. What this mini crisis actually shows is that an open-ended fund is not the ideal way to get exposure to direct commercial property assets. These assets are illiquid – and not only do they take time to sell, you don’t want your fund managers to be forced to sell just at the worst possible moment in the cycle.

This is why closed-ended funds are so much more appropriate for advisers and investors who want to put money into this sector. The structure of an investment company ensures liquidity for its shareholders – if they want to get out of the fund, they can simply sell their shares on the open market. They may incur a loss, but there’s no need for the fund manager to worry about funding redemptions, or coping with the ebbs and flows of investor demand; investors don’t get locked in.

That’s not to suggest investment companies with commercial property holdings have not suffered over the past few weeks. Most have seen sharp share price declines – and the discounts at which their shares trade relative to the value of the underlying assets have widened significantly.

Crucially, however, investors in these funds are not stuck in them. Those who want to sell – not to suggest this is the right course of action – have the option of doing so. And importantly, even if large numbers of investors do decide to move on, the interests of those who remain will not be damaged; there will be no need for sales of these funds’ assets, let alone fire sales.

This isn’t the place to consider the immediate prospects for commercial property. But for those advisers who believe this asset class has a role to play in the long-term financial planning strategies of their clients – remember those yields and long-term capital gains – now isn’t the time to be spooked.

For one thing, these difficult periods have come and gone in the sector before. For another, closed-ended funds offer a route into commercial property that will protect investors from some of the problems we’ve seen in recent days and weeks. Indeed, some advisers and analysts argue now is the time for commercial property investors to go bargain hunting in the investment company sector.