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