As we near the first anniversary of the UK’s initial Covid lockdown, many people are still working from home. The end of lockdown may finally be in sight but remote working looks set for the long term, with some companies opting not to renew office leases.
It remains to be seen just how many firms will do so, and whether it will become commonplace.
The commercial property sector in general has taken a hit in the past few years during various market events. The Brexit vote in 2016 saw an immediate fallout, and in March 2020 numerous funds were suspended when lockdown measures were initially announced.
Some property funds have since reopened, such as offerings from BMO, Canada Life Asset Management, Columbia Threadneedle, Legal and General and Royal London. Janus Henderson’s UK Property fund has reopened in the past few weeks, but M&G’s Property Portfolio has been closed since December 2019.
The disruption to the property space is hardly surprising given what has happened to markets. Property funds spent most of the past 12 months in negative territory for performance and sales.
The Investment Association has two fund sectors dedicated to property: the UK Direct Property sector, which invests in bricks and mortar, and the Property Other, which invests elsewhere in property companies or in overseas properties. UK Direct Property funds are harder to gauge performance-wise due to valuation issues.
While funds in the UK Direct Property sector are valued daily, the properties themselves cannot be. The sector can appear less volatile, with fewer highs and lows; however, should a market crash or boom once the properties have been valued, the sector can see fast changes. For example, if there was a property bubble and valuations massively dropped, the UK Direct Property space could start to see steady dips in returns.
The UK Direct Property and Property Other sectors both had negative flows throughout the year, with October the highest at £163m, soon after some funds reopened.
Property funds traditionally invest in commercial real estate rather than residential property, and the space is more generally divided into retail, industrial and office.
Investment trusts are another option for investors, with Real Estate Investment Trusts also available, but these too have taken a performance hit in the past year.
In 2020, the FCA launched a consultation into the ‘liquidity mismatch’ in open-ended funds, with many hailing the proposals to address the potential harm from liquidity in certain open-ended funds. The regulator suggested that investors should notify fund managers in advance if they wanted to redeem their investment, proposing a period of 90–180 days. The aim is to enable funds to operate ‘fairly and efficiently’ in the interests of investors. At the time, the Association of Investment Companies said the proposals were “a step in the right direction”. Responses will be published “as soon as possible” in 2021.
Despite the challenges the commercial property market has faced, rent has still been expected to come in, so the space has not been in as much trouble as some might assume. Commercial property covers all sorts of non-residential space, such as offices, hotels, hospitality and retail, many of which have been empty for a long period. A lot of properties have not offered rent concessions, so, while empty, the property is still making money.
The chart shows the IA Property Other, IA UK Direct Property and AIC’s Property UK Commercial sector averages over the past five years. While it is clear the UK Direct Property space has had the smoother ride over the years as previously mentioned, sharp drops can be seen after the June 2016 Brexit referendum and in subsequent weeks.
The unit trust and investment trust spaces are similar in terms of where they invest, hence their performance is roughly correlated.
Looking specifically at funds within the space, investment trusts have seen the highest returns — as well as the lowest — with the unit trust counterparts firmly in the middle and the Property Other sector showing the highest average returns.
While there was a huge dip in performance this time last year, returns seem to be improving once more. Only time will tell how the space will fare as people continue to work from home, shops close or office leases are not renewed, as well as how the FCA’s consultation will pan out this year — but the sector may still be one to consider.
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