The IA Property sector has seen its third month of consecutive net outflows, according to the latest Investment Association figures, and many industry experts believe now is a good time for investors to lock in their recent stellar gains from the asset class. 
Though direct commercial property funds were seen as deeply unfashionable this time five years ago, various macroeconomic factors led to a revival in fortunes in an asset class which scared many an investor during the global financial crisis.
These include a pick-up in the UK economy as well as the very low yields on offer within the fixed income space, with many viewing ‘bricks and mortar’ funds as an ideal alternative to traditional bond portfolios given their income credentials and low correlation to equities.
These dynamics sparked a rally in property funds and the returns they have delivered – certainly compared to other areas of the market – have been very strong indeed.
According to FE Analytics, the average IA direct commercial property fund has returned 37.34 per cent over the past three years, compared to a 13.36 per cent gain from corporate bonds, a 12.74 per cent return from the UK equity market and an 11.44 per cent rise in gilts.
Performance of sector versus indices over 3yrs
Source: FE Analytics
The graph above also shows how little volatility investors in property funds have had to endure over that time compared to bonds and equities, though that is partly a result of the more sporadic pricing dates within the sector compared to more liquid areas of the market.
However, as yields within the sector have dropped significantly over the past three years (the average yield in the sector was 3.5 per cent in 2013 and that has fallen to 2.7 per cent today, according to FE data) and the fact uncertainty continues to persist in regard to a potential Brexit, should investors be looking to take money out of the asset class?
Having been a long-term bull on UK property Justin Onuekwusi, lead manager of the L&G Multi-Index range, says he has and will continue to reduce his weighting to it within his portfolios.
“UK property, for us, has been one of the most attractive asset classes from a risk-adjusted return perspective. However, we now expect going forward that the abnormal returns we have seen are effectively over,” Onuekwusi said.
Though still positive, returns from property funds have certainly started to slow more recently. FE data shows the average IA direct commercial property fund is now underperforming equities, corporate bonds and gilts in 2016 despite this year’s general market volatility, for example.
Performance of sector and indices in 2016
Source: FE Analytics
As mentioned earlier, money has – on aggregate – flown out of the IA Property sector in each of the last three months, which is certainly a change in trend compared to the last few years.
Indeed, the sheer weight of inflows into property funds last year meant managers who forced to keep high levels of cash on their books while they waited for transactions to go through. In turn, FE data suggests this caused income-payouts from direct commercial property funds to drop significantly compared to 2014.
According to FE Analytics, the average distribution in the sector was the lowest it has been since 2010.
Annual income distributions from property funds
Source: FE Analytics *figures based on a £10,000 investment in January 2011
However, it must be noted that net outflows were just £20m last month and so there certainly hasn’t been indiscriminate selling.
Also, though Onuekwusi has been reducing his overweight, he sees no reason why investors should ditch property funds altogether within their portfolios.
“We are going to see normality in those returns, say the 5 to 6 per cent level over the next few years. With that, it makes sense to reduce our overweight,” Onuekwusi said.
“However, I think it is important to note that we don’t think the property market is going to crash. There are some important supports in the property market.
“Construction is at the lowest level it has been since the 1980s (especially outside of London), rents continue to increase especially in the industrial and office space and, last but by no means least, it still offers that diversification from equities and bonds whilst still offering a decent yield.”
He added: “With bond yields being so low, we think that is particularly important.”
Guy Stephens, managing director at Rowan Dartington Signature, holds a similar view to Onuekwusi.
“Commercial property has been attractive for some time and remains so, for the time being, but the ‘bricks to clicks’ revolution in the retail sector is causing many retailing tenants to reappraise their estate with regard to how their customers will transact business”, Stephens said.
As such he certainly doesn’t expect a crash in the property market (like was seen during the global financial crisis) yet he argues that by buying now, investors have missed the best returns that funds in the space have to offer.
Performance of sector over 20yrs
Source: FE Analytics
“So, investment in commercial property is still looking good for now as there is not yet any sign of pricing weakness, UK economic growth is reasonable and yields do not suggest a bubble,” Stephens said.
“However, returns are likely to be more modest than in the past few years and this should be borne in mind when making a fresh investment from here.”
Others, though, think it is certainly prudent to take money off the table in regard to property funds, such as Michael Stanes at Heartwood who believes that Brexit uncertainty will put pressure on prices for the time being.
“In the coming months, we would expect a period of subdued activity as overseas investors wait to see how the referendum campaign evolves,” Stanes said.
He added: “However, post June we would expect flows to pick up as international investors take advantage of the fall in sterling, and on the view that any exit will take time and is unlikely to prove damaging to UK asset values in the long term.”