Sound investments based on economic reality will win the day

It is impossible to address the outlook for property without first looking back to the Brexit referendum’s aftermath and the resulting struggles of many open-ended direct property funds.

We are now almost five years past the vote. While broader investment circumstances have changed, the bricks and mortar property funds’ structural headwinds remain the same. 

The conflicting dual position of open-ended daily liquidity and illiquid assets was again exposed in 2020, this time by the Covid-19 lockdowns.

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Funds were forced to gate once more over what, in investing terms, was a relatively short period. 

Though situations such as Covid-19 and Brexit might be rare events, there will be other, mostly, unforeseen events which will induce panic.

In investing there is a great temptation to fight ‘the last war’ and at the first sign of trouble there will be a rush for the exits. 

These particular investment vehicles’ structure means gating and liquidity issues are something an investor must accept or not invest in them at all. We concluded the risk/return profile no longer supported our investors’ best interest, and we sold out of our direct property positions in February 2019.

Unless there are significant structural changes to these investment vehicles, we are unlikely to reinvest.

A change in corporate thinking

We are just as apprehensive about the asset class more generally. What has made the series of Covid-19 closures more concerning for property assets, is that it is unlikely to participate as strongly in an end of lockdown recovery alongside other assets that have struggled during the lockdown. 

It is undeniable that the pandemic has brought about a considerable change in corporate thinking.

Lockdown conditions have persisted far longer than many expected and even the most technology resistant of us have been forced to adapt to the ‘new normal’.

The evolution, acceptance and, in many cases, successes of working from home practices have brought to the fore business questions regarding necessary office space and the requirement for expensive central offices. We need only look at recent announcements by prominent asset managers such as Man GLG to see that things are already well in motion. 

Even within the hardest hit sectors, there will ultimately be winners as well as losers over the coming years. However, the winners look hard to select, even if you were constructing a property portfolio from scratch.

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The reality is fund managers have existing portfolios made however carefully in a pre Covid-19 world. These could prove challenging to sell in a market where assessing the new real value of assets accurately looks increasingly difficult.

Property ultimately has an exact price and its true whether it is your own home or an office block; it is worth what somebody else is willing to pay for it. 

Income-producing assets

An advantage of holding property assets, whether securitised or direct, has historically been the predictability of the yield. A higher relative yield is currently attractive considering the historically low yields in the fixed income sector.

However, as multi-asset investors, we do not look at property in isolation but assess the potential outlook for property against other income-generating assets and prevailing economic conditions. 

An economic discussion point that has dominated 2021 so far has been the inflation outlook, with many investors fearing that even looser monetary policy may produce a significant inflationary spike. 

For the first time in years, we need to seriously consider the impact of inflation on asset prices. For income-producing assets, the prognosis looks particularly challenging. The income portion of total returns tends not to keep up with inflation, and returns are instead driven by capital growth.

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