You may have seen news stories about property fund suspensions. Should we be worried that this is a sign of impending financial Armageddon?
It might just be worth explaining how property funds work. Obviously the key investment is property, but usually these funds also have ready cash available to pay a steady stream of investors who may want to cash in their investment. This cashflow is also supported by new investors to the fund. Property is not a liquid investment, it cannot be easily or quickly bought and sold. In normal circumstances it doesn’t have to be. However, if investment confidence drops and suddenly more investors want their cash out than can be borne by the cash balances and inflows to the fund, then this creates a problem. The worst thing for investors would be a quick “firesale” of properties which is why the decision to temporarily suspend the fund is taken.
Investing in property funds carry some risks, we have seen suspensions before after 9/11 and the 2008 crash so nobody should be convinced otherwise. They can however provide a high yield and as long as rents keep coming in then that will continue. Again this is not without risk.
However, it’s important to put thing in perspective. For many clients, this is not an issue as there are ways to gain exposure to property while avoiding these liquidity risks.
Where clients do have exposure to open-ended physical property funds, this tends to form only a small part of our clients’ portfolios, typically less than 10%. Accordingly, this means that they are still able to access income and capital from their portfolios if they need to. This is why diversification is such a powerful investment principle and one that we abide by as a firm.
We are long term investors, not short term speculators and our clients’ portfolios are designed to withstand tough market conditions. We continue to keep our eyes on events in these challenging times for investors.