Managers are growing increasingly cautious on short-term commercial property markets, with Ignis the latest to warn investors of a potential drop in capital values.
Ignis issued a briefing note to investors in its £510m UK Property fund last week. It advised of a potential short-term disconnect between capital value growth and rental value growth, saying yields for prime stock ran the risk of over-correcting in the short term leading to a moderate retrenchment in capital values.
Last week Jupiter’s Philip Gibbs told Investment Week he has opened up a net short position on “overvalued” UK commercial property stocks in his new Absolute Return fund, while Threadneedle UK Property Trust manager Don Jordison has also warned of difficult times ahead in the sector short term.
Ignis, whose UK Property fund is ranked first in the IMA property sector over five years to 22 February, says the situation has been exacerbated by an insufficient supply of quality properties to meet demand, with 20% of the fund currently being held in cash.
However, the company remains “very positive” on commercial property in the medium term and predicts returns of between 8% -9% per annum. Even in the short term returns will remain positive, it adds.
Net sales into property funds were £1.4bn in Q4, up from £422m the previous quarter, according to the IMA. Ignis says it expects its warning to lead to reduced inflows in the short term but felt it appropriate to inform investors and advisers of its forecast.
“UK property as an asset class has seen significant inflows in recent months, with investors attracted by the high and relatively stable income and positive medium/long-term outlook,” the briefing note says.
“Levels of demand have, however, not been matched by the supply of the institutional grade properties to the market that Ignis believes are suitable for the fund.”
“In addition, given the short-term disconnect between capital value growth and rental value growth, Ignis also believes yields for prime stock run the risk of over correcting in the short term leading to a moderate retrenchment in capital values.
“While a short-term correction poses little threat to those with a medium to long-term time horizon, Ignis believes it prudent to highlight potential pricing pressures in the current market to both existing investors considering adding to their holding and investors entering the fund for the first time.”
Marcus Langlands Pearse, who manages the £761.52m New Star UK Property Unit Trust manager says large inflows combined with a lack of good stock has left some managers feeling uneasy.
“There is definitely more stock on the market than there was pre-Christmas, but the problem is whether it is of a decent quality,” Langlands Pearse says.
“The issue is fund managers who are pregnant with cash, because they are bleeding so much performance away to their cash weighting, are they being forced into a buying situation, which I think Ignis and Threadneedle are being careful that does not become the case.
“We all want to prudently buy in stock which we feel is most appropriate for the fund rather than just what is on the market.”
