Property Funds: The Doom and Gloom has been overdone

17 February 2021

Many of our clients will be familiar with property funds. Investing in commercial – rather than domestic – property, these funds have been part of many clients’ portfolios, typically providing a balance to higher risk equity funds. 

That, of course, was before Covid-19. When the UK went into lockdown in March last year many property funds had to suspend dealing. Anyone who has ever bought or sold a house knows that a physical inspection of the property – a valuation – is an integral part of the process. The same is true of commercial property. 

When the pandemic struck, valuers declared ‘material uncertainty’ – a clause meaning that a valuation has been prepared ‘under extraordinary circumstances’. That meant valuations could not be relied on, which in turn meant that many property funds took the decision to halt dealing. 

As lockdown eased in the summer, valuers gradually lifted the ‘material uncertainty’ clause, finally removing  it from virtually all UK property at the beginning of September. With funds having been suspended due to material uncertainty, it was generally assumed that they would start trading again immediately: in fact, very few reopened as soon as they could.  

With another round of lockdown in November – and the current one set to last until March – should investors remain wary of property funds in the long term? After all, there were plenty of stories of landlords failing to collect rent in the fourth quarter of 2020 – and we all know what a bad year it was for retail. Add in ‘the decline of the office’ – another recurring theme at the moment – and you could be forgiven for thinking that no sane investor would ever touch a property fund again. 

There are, though, real grounds for optimism in the economy – and that optimism may well be reflected in property funds. In its recent quarterly forecast, the Bank of England said it expected the UK economy to “recover strongly from the second quarter of 2021, towards pre-Covid levels”. 

Depending on which paper you read, ‘Brits have stashed away £100bn in lockdown’ or the ‘UK economy [will] reach pre-pandemic levels if Brits spend £125bn savings’. 

There is some doubt about the figure – and some doubt whether we have ‘stashed it away’ or cautiously saved it. What is undeniable is that we have saved money during lockdown – witness the problems the ‘sandwich’ or ‘commuter’ economy is having – and with interest rates close to zero there is every reason to suspect a lot of it will be spent as restrictions are relaxed. 

It is therefore reasonable to think that property funds will once again come to play their part in investors’ portfolios, once again balancing the higher-risk/higher-reward equity funds and giving clients portfolios which reflect their long-term financial planning goals.