There’s been a lot in the press at the weekend about fears that commercial property funds are running into trouble.
The sector has been hurt by news that various funds, including New Star UK property – the most popular fund picked for individual savings accounts (Isas) last year – had cut the price at which people could cash in their holdings. The move is in response to a wave of selling in recent weeks.
The official advice is still “don’t panic.” Mark Dampier of Hargreaves Lansdown says: “There is nothing drastically wrong, it’s just that funds of fund managers and other asset allocators have decided they have had the best of the returns from property and decided to move on – and private investors tend to follow a bit later.”
But if the institutional investors reckon the best bits are gone, then why stick with a losing asset class?
Commercial property funds including New Star Property, Norwich Property and Norwich Property Investment have seen their values fall since the start of the year.
Rising interest rates are making the returns on commercial property look unattractive. As Capital Economics points out, government bonds currently yield more than commercial property. As commercial property is fairly risky, while government bonds are risk-free, investors are unsurprisingly starting to think that commercial property looks overvalued, and acting accordingly.
Experts are suggesting that retail investors should stick where they are. In The Sunday Times, Justine Fearns of Chase de Vere says: “Recent investors who got in at the top need to stick with it for the long term and not move in and out. Over five to ten years, your investment should come good even if in the short term returns are poor.”
This doesn’t make a lot of sense to us. ‘Cut your losses and run your profits’ is the general advice given to investors in shares. You should do the same for asset classes. Why? Well, anyone who got in at the top of either the Nikkei bubble at the end of the 1980s would still be looking at a capital loss of around 50%, nearly 20 years later. And if you’d stuck your money into the Nasdaq around the year 2000, you’d also still be heavily in the red, about seven years later.
As soon as you realize that you’ve made a bad investment decision, don’t sit on it, assuming it will “come good” one day. Just cut your losses and find a better investment.
Even the property developers themselves are hard put to be wildly positive about the market. John Richards, chief executive of Hammerson, tells The Telegraph this morning that he believes – surprise, surprise – that prime properties in London and the South East will continue to do well. “However we are going to see secondary assets fall in value.” Secondary assets, says The Telegraph, are “typically offices and shopping centres in smaller towns.”
This seems a little optimistic to us. Undoubtedly these secondary properties will suffer first. But this idea that London exists in a sort of super-rich bubble, suspended and aloof from the rest of the global economy like a precious diamond atop a slag-heap, continues to intrigue us.
Whilst the rich have plenty of money to throw around, that doesn’t mean they’re stupid with it. Ultimately, if you can see that commercial property yields less than risk-free government bonds, then why put your money into commercial property, in London or otherwise?
Competition for property investments in London – be they residential or commercial – has been driven by the same force pushing up prices everywhere else, in assets from art to emerging market bonds. That is, a cheap and plentiful source of money. When the liquidity dries up – and with interest rates rising and turmoil throughout the credit markets, that’s exactly what’s happening just now – money won’t be so widely available.
That will hurt everyone and everything – even London. In fact, as the new capital city of the global financial services industry, London may well find that it is hit harder than most when the downturn in the financial services hits home.
We’ll soon see, we’re sure. Times are getting tougher, even if there are only the faintest murmurings in the press about it. In the first six months of this year, 191 companies have put out profit warnings, up 13% on last year. It’s the highest level seen since 2001, around the time of the tech stock crash.
You can read more about the turmoil in the credit markets in the latest issue of MoneyWeek, out just now. James Ferguson explains what the bond markets are telling us, and why the US could be heading for a recession.
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Turning to the wider markets…
In London, the FTSE 100 ended Friday 21 points higher, at 6,716. Financial groups did well, with hedge fund group Man continuing to gain after a decent trading update on Thursday. Miners eased back on profit-taking after recent hefty gains. For a full market report, see: London market close.
Elsewhere in Europe, the Paris CAC-40 closed 15 points higher, at 6,118, whilst the Frankfurt DAX-30 gained 39 points to close at 8,092.
Across the Atlantic, US stocks made further gains, buying into multinationals and industrial stocks in the hope that the weaker dollar will help US exports. The Dow Jones hit a record high, adding 45 points to end the day at 13,907. The Nasdaq was 5 points higher, at 2,707. And the S&P 500 closed up 4 points at 1,553.
In Asia, Japanese markets were shut for a holiday. Markets in both South Korea and Taiwan fell as technology stocks declined. Samsung Electronics fell by the most in three years as memory-chip prices fell.
Crude oil had climbed to $74.15 whilst Brent Spot rose to record levels, trading at $80.25 this morning.
Spot gold was at $666.90 this morning, while silver was trading at around $13.03. For a more in-depth gold market report, see our section on investing in gold.
In the currency markets, the pound was trading at 2.0367 against the dollar this morning. Meanwhile, the pound was at 1.4772 and the dollar was at 0.7255 against the euro. And the dollar was at 121.87 against the Japanese yen.
And this morning, plumbing and heating equipment giant Wolseley has warned that pre-tax profit in the 11 months through June fell 5%. Competition in the US, where the company makes about half of its sales, has hit prices as the housing slump continues. The group is set to close 24 branches and cut 370 jobs, on top of the 4,000 it has already removed this year.
And our two recommended articles for today…
Should you rush into Aim’s property boom?
– With UK commercial property performing poorly, it’s no surprise investors are looking for the exit. Many are now investing in foreign property funds listed on Aim: Should you rush into Aim’s property boom?
Profit from the growth in green packaging
– Biodegradable packaging isn’t just a PR exercise for the retail industry. It makes good business sense as well. Eoin Gleeson reveals the companies set to profit: Profit from the growth in green packaging