As we all adjust to a post Brexit UK, the first indicators on how the vote has impacted the economy are starting to filter through. Today the Bank of England has cut interest rates to its lowest rate for seven years in an initial bid to stave off a recession.
One way in which Brexit has already impacted some investors is the suspension of some of the largest and most widely used property funds which are held within many UK investors’ pension and investment portfolios. Many investors speculate that the Brexit vote is bad news for commercial property prices and all want out at the same time. As these funds are invested in bricks and mortar, the fund managers simply do not have the cash to fulfil these calls and as a result many have suspended trading or levied huge charges on redemptions.
It seems that investors and their advisors have short memories. We have seen this before and not even that long ago. During the financial crisis of 2008/2009, many property fund managers had to take similar action in the face of huge demands for withdrawals resulting in some funds remaining closed for many months. Some investors had very large sums rendered unavailable with real consequences for their finances and their lives.
The British public have traditionally had a soft spot for property. It is (rightly or wrongly) considered a safe (as houses) place for cash and over recent times has offered sometimes spectacular levels of return.
At BDB though, our scientific investment philosophy demands we look to the evidence rather than sentiment before we include any investment in our recommendations for our clients.
Our investment committee continues to debate the merits of including property within our portfolios and so far it has remained off the menu.
Property does meet our definition of an asset class and there is an obvious economic rationale for why we should expect a return from it through growing rental yields. Furthermore, there is strong evidence to suggest that it offers a significant diversification benefit when blended with equities and fixed interest assets in a portfolio.
However, property is by its very nature illiquid. It is difficult to attain high levels of diversification and frictional costs such as management, maintenance and vacant tenancy periods eat into what at first can look like very attractive levels of headline returns.
Our clients investment and pension portfolios are the engine which delivers the truly successful lives we are helping them to achieve. If the value is tied up when you need it, property used only as an investment looks worse than useless.
We continue to search, but are yet to find a convincing method of accessing this valuable asset class in a way which addresses what we consider to be the unacceptable risks. So, despite its initial allure, property is going to remain as a discussion item only for our investment committee, at least for the time being. Property will remain an important part of the picture for our clients, but it won’t be part of our recommended investment portfolio.
If you’d like to talk to us about what is in your portfolio, or how our personal finance director service might help you, why not get in touch?