The lat­est prob­lem fac­ing com­mer­cial prop­erty funds: too much cash com­ing

The Daily Telegraph - Your Money - - YOUR MONEY - James Con­ning­ton

Fol­low­ing the Brexit vote, multi­bil­lion pound prop­erty funds were forced to cut the value of their port­fo­lios or lock in in­vestors to stem a tidal wave of out­flows.

But in seven short months the sit­u­a­tion has re­versed.

Now the £1.2bn Columbia Thread­nee­dle UK Prop­erty fund is so much in de­mand that it is hav­ing to take ac­tion to stem some of the in­flows.

This re­turn to pop­u­lar­ity sig­nals re­cov­er­ing sen­ti­ment.

Columbia Thread­nee­dle’s fund is struc­tured as a unit trust. In this type of fund, units are cre­ated when in­vestors put new money in and can­celled when in­vestors sell or with­draw money.

They typ­i­cally have a “buy” price and a “sell” price, oth­er­wise known as the “of­fer” and “bid” prices. These can be ma­nip­u­lated ac­cord­ing to the gen­eral di­rec­tion of the flow of in­vestors’ cash.

The gap be­tween the two prices – or the “bid-of­fer spread” – can be wide in the case of prop­erty funds, as the trans­ac­tion costs of buy­ing and sell­ing build­ings are high.

When there is more money flow­ing in than out, the man­ager can use “of­fer” pric­ing to shield ex­ist­ing in­vestors. In this sce­nario, the “buy­ers”, or those put­ting money in, bear the costs of ex­pand­ing the fund by buy­ing new as­sets.

When there is more money flow­ing out than in, on the other hand, the man­ager can use “bid” pric­ing for the same rea­son.

In that sit­u­a­tion the “sellers” carry the cost of shrink­ing the port­fo­lio through the sale of as­sets.

Where the fund man­ager makes the switch from one pric­ing ba­sis to an­other, ex­ist­ing in­vestors will see the sale value of their units rise or fall by the size of the spread.

Columbia Thread­nee­dle’s fund has moved to “of­fer” pric­ing to re­flect in­creased in­flows, so ex­ist­ing unit hold­ers will ben­e­fit from an up­lift to their unit val­ues – if they were to sell them – of around 5pc.

Don Jordi­son, man­ag­ing di­rec­tor of prop­erty at Columbia Thread­nee­dle, said: “The change re­flects in­vestor recognition of the virtues and strength of prop­erty as an as­set class.”

At present, prop­erty funds typ­i­cally of­fer a div­i­dend yield of be­tween 3pc and 5pc, at­tract­ing many in­come in­vestors.

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