The case is closed-ended

One year after a string of property funds announced they were suspending trading following a panic in the market caused by the UK’s vote to leave the European Union, investors are breathing a little more easily. The funds, which held more than £18bn of investors’ money, are once again open for withdrawals, with turmoil in the market having subsided. Performance has been strong too.

I’ve argued before that last year’s upheaval underlined the case for using investment companies if you’re looking for exposure to the commercial property sector, rather than open-ended funds. No investment company had to shut up shop, even at the worst moment of the crisis, because of the structural advantages these funds enjoy. While open-ended funds may be forced to sell property at unattractive prices in order to meet investor redemptions, the closed-ended nature of an investment company means this problem simply doesn’t arise.

But does the short-lived nature of last year’s turmoil mean that we shouldn’t get hung up on the question of structure? After all, most investors in open-ended property funds didn’t want to get their money out last year and were therefore unaffected by the trading suspensions. And it’s not as if investors in investment companies didn’t suffer; they watched the share prices of their funds take a hit as valuations in the property sector slumped.

The short answer to this question is that structure really does matter in property investment – for two important reasons.

The first issue is that no investor wants to be in a fund where redemptions may be suspended or financially penalised, even if only for a short period. There’s no knowing how long such crises may endure – and for investors with financial planning needs, which may include unexpected demands, this can be a real headache.

The second point is even more fundamental. In the past at least, investment companies have tended to outperform their open-ended counterparts when investing in property. Data just compiled by Money Observer magazine shows that over the 12 months following last year’s EU referendum, to 22 June 2017, the average UK investment company investing directly in commercial property returned 13.7 per cent, compared to 9.8 per cent from their open-ended fund rivals. Over the past five years, the average investment company in the sector has delivered 87 per cent, against 52 per cent from the typical open-ended fund.

Nor is it just capital gains where investment companies are delivering. Money Observer points to research from the investment company analyst Canaccord Genuity, which shows that just a single open-ended fund has this year offered a yield that could match what’s on offer from the FTSE All Share index. Investment companies, by contrast, consistently offered more income.

There’s no sophisticated explanation for investment companies’ outperformance in what has been a rising market for property. Since the managers of these funds don’t have to worry about redemption requests, they’re free to invest fully; open-ended funds managers on the other hand, must keep a comfortable chunk of assets in more liquid assets in order to be confident they can meet redemptions when they arise. They’re unable to invest fully in the market to which they’re attempting to offer investors exposure.

The lesson of recent history is clear. For investors looking for a less anxious route into property and the potential for superior returns, investment companies are a better option than their open-ended counterparts.