With Britain’s favourite topic of conversation – how much has your house price risen? – under threat, it’s no surprise that the housing market is hogging the headlines at the moment.
But another area of the property business that hasn’t been receiving quite as much attention, is in just as much, if not more trouble, than residential property.
Commercial property doesn’t hit the headlines outside the business sections. After all, while we all need somewhere to live, we don’t all own business premises.
However, because of the general mania of the property boom, these days a lot of people actually do own at least a stake in an office block or warehouse. Commercial property funds, up until this year, have been among the top choices of investment for retail investors.
So now that prices are falling, a lot of inexperienced investors stand to lose out substantially. And that’s lending an air of panic to the sector…
In October, according to the Investment Management Association, investors pulled £48m out of commercial property funds, the first net outflow all year, as it becomes obvious that the sector is in trouble. Total returns in the sector (that is, including capital gains and rent), fell 2.6% in the three months through October. As Geoff Tresman of independent financial adviser Punter Southall tells The Telegraph, the sector “is dead in the water.”
Don’t trust the ‘experts’
One of the most interesting aspects of the whole slide in commercial property is the way that it shows that you should never pay attention to the ‘experts’, who almost always attempt to engage in some form of damage limitation when they’re talking to the press.
At this time last year, you could easily find talking heads saying that commercial property might face a slowdown in 2007. They’d casually admit that the days of double-digit returns were over – since 2003, commercial property prices have risen by more than 18% a year. Investors might see a mere 8% or so return in 2007. These guys, of course, know just fine that 8% is a more than ample return which most investors would happily jump at.
But now we’re seeing values fall. If you’d invested in the average commercial property fund at the start of the year, you’d have lost money by now. According to The Scotsman, funds that invest in property company shares have lost an average of 8.8% in the six months through October, while those that invest directly in commercial property have lost 3.6%. In other words, most people invested in commercial property won’t make any money this year; and none of them will make 8%.
The trouble with selling property
Now as people realise that they could probably find a better home for their money – a cash Isa perhaps – they’re withdrawing it as fast as they put it in. But here’s where the big problem with investing in property becomes obvious.
Property’s not like shares. You can’t sell it in a hurry. Office blocks are big, lumpy assets. To make up for this, property funds carry a certain proportion of their money in cash and property shares, to provide a cushion to absorb any redemptions. But those cushions are disappearing with unnerving speed.
The Telegraph reckons that Scottish Widows Investment Partnership’s cash holding has fallen from 10% to 5% of its £1.2bn commercial property fund. Meanwhile, Norwich Union’s Norwich Property Trust saw the proportion of cash and shares it carries fall to 12.4% from 17.5% between September and October.
As one property fund manager told The Sunday Telegraph, “If the liquidity levels in these funds fall much further, managers will start to get very worried. They are trapped between an illiquid property market and the highly liquid structure they offer investors. In markets such as these, the two just don’t tally.”
It’s all miserably familiar. When the money’s free-flowing and credit comes easy, no one cares about liquidity risk – because there is no liquidity risk. You don’t have to worry about ease of access to your money, because there’s so much of it around. Besides, why would you ever want to pull your money out of a property fund? Property prices only ever go up, don’t they?
But as we’ve seen already this year, when liquidity risk makes a comeback, it returns with a vengeance. Try telling people that they can’t withdraw their money from your institution and just wait to see the queues build up at your door, as Northern Rock discovered the hard way.
Property funds of course, are able to freeze withdrawals, if necessary, more easily and legitimately than your average savings bank. But the first one to do so will virtually guarantee a run on the others.
You can read more about commercial property in our recent briefing in MoneyWeek on the subject: Time to bail out of commercial property. And if you’re not already a subscriber, why not sign up for three free issues now by clicking here: Free trial
Turning to the wider markets…
In London, the FTSE 100 closed up 69 points at 6,554. Housebuilders were stronger after the Bank of England interest rate cut on Thursday. Miner Xstrata also rose sharply on bid speculation.
Elsewhere in Europe, the Paris CAC-40 added 44 points to end the day at 5,718. And in Frankfurt, the DAX-30 was down 53 points to close at 7,994.
Across the Atlantic, US stocks ended little changed, though higher on the week, as traders worried that stronger-than-expected jobs data might put the Fed off cutting interest rates. The Dow Jones ended 5 points higher to close at 13,625. The tech-rich Nasdaq was off 2 points, at 2,706. And the broader S&P 500 fell 2 points to end the day at 1,504.
Crude oil futures had slipped to $87.62 this morning, and Brent spot was at $87.63 in London.
Spot gold was trading at $799.10 this morning, while silver was trading at around $14.38.
Turning to the forex markets, the pound was at 2.0399 against the dollar and 1.3912 against the euro. And the dollar was at 0.6822 against the euro and 111.63 against the Japanese yen.
And this morning, investment bank UBS has issued a surprise profits warning. The bank is to write down another $10bn in subprime mortgage investments, and make up the capital by selling stakes to Singaporean and Middle Eastern investment funds, according to Bloomberg. Singapore’s GIC will take a 9% stake in the group for 11 billion Swiss francs, while the unidentified Middle Eastern investor will pay two billion – making a total investment of 13bn francs ($11.5bn). UBS may now post a loss for the full-year 2007.
Finally, our recommended articles for today…
Why this Christmas will be the US economy’s last hurrah
– The image of Christmas portrayed in the media is of happy, affluent-looking Americans shopping for flat-screen TVs and cashmere sweaters, says Richard Benson. The real picture will be of shoppers pulling out the only credit card they haven’t already maxed out for one last consumer binge before the recession bites. For more on the grim outlook for the US economy, read:
Why this Christmas will be the US economy’s last hurrah
Another way to invest in films
– You don’t need to be George Clooney or Brad Pitt to get rich from the film industry. In fact, you don’t even have to put in any work behind the camera, as one London-based business has shown. Tom Bulford looks at a fresh way to invest in Britain’s vibrant film industry here:
Another way to invest in films