Last year was one of hysteria for property investors but the market looks to be back on track with fundamentals relatively positive, according to Columbia Threadneedle property investments managing director Don Jordison. 
In 2016, investors grew concerned for the prospects of UK property, with many funds forced to suspend to stem the extraordinary outflows.
The £1.2bn Threadneedle UK Property AIF fund, which Jordison runs alongside Gerry Frewin, was one of the last to close and one of the earliest to reopen, according to the manager.
He said while this was a “regrettable” but that the measures were necessary, with the fund getting redemptions of around £50m per day at the height of the hysteria.
“12 months ago I was up to my ears in redemptions,” the manager said, adding: “It was hysteria and I think a lot of the worst offenders are slightly embarrassed about their conduct now.”
He said many investors viewed the Brexit result as a tough one for UK commercial property, with fears many businesses would look to move abroad.
“[People thought] we’re coming out of Europe so everyone will leave the UK and leave their empty commercial properties behind them leaving their keys on the beach as they left which was a bit of an overreaction,” he explained.
“It snowballed because that belief turned into redemptions that were then hand-fistedly dealt with by people fooling around making fair pricing adjustments that just led to a lack of confidence in the sector.”
Jordison said this ‘snowballing’ effect was only in the open-ended, daily-dealt retail funds however, which represent just 3 per cent of the UK property market.
Yet, due to the liability balance between having an illiquid asset base and a daily-dealt need to generate liquidity, these funds have a disproportionate influence on the market, he noted.
This is shown in the below chart, which shows the overall effect of inflows into these open-ended vehicles on the wider UK commercial property market.
“This is an incredibly depressing chart because we decomposed the total returns of the commercial property market going back to 2009,” Jordison said.
“This is an incredibly depressing chart because we decomposed the total returns to commercial property market going back to 2009.
Total returns & investor flows into pooled property funds
Source: Columbia Threadneedle
“The dark line is income and well that just plods on. That is easy. The sky-blue line is more volatile and that is capital growth in the market.
“And there is this really horrible 90 per cent correlation between flows in and out of open ended property funds [the purple line] and short-term movements in commercial property capital values.”
“I didn’t go to college and learn about land economy to be in a market which is driven by IFAs selling or redeeming out of open-ended funds but that is just the way it is,” he added. “It is ludicrous the disproportionate effect it has.”
As the chart shows, last year the market lost 3 per cent in value thanks to the open-ended structures being forced to sell assets at cut-down prices.
He said: “97 per cent of the market did nothing, it was just that 3 per cent of the market started giving property away at 20-30 per cent less than it was worth to raise liquidity.”
However, the manager said that when he came to sell in order to meet the redemptions, he sold £250m of property in six weeks in 40 deals at values higher than before the EU referendum.
“That isn’t because we were super clever, it was because there was super amounts of debt and equity around and a high demand for commercial property from the other 97 per cent of the market that were unconcerned about daily dealings and redemptions,” he explained.
Indeed, this accommodative environment, with an abundance of cheap debt and excess equity has meant that the property market has pretty much recovered from last year.
He added: “We’ve clawed it all back so that one-off, knee-jerk, liquidity-driven reaction with some forced sellers inhabiting the space that led to the 3 per cent sell-off in values, most of that has been reeled in.”
Performance of fund over 2yrs
Source: FE Analytics
Indeed, as the above chart shows, the fund has now returned 7.93 per cent over the last two years, having fallen as much as 8.26 per cent last year.
While the manager said he was concerned around the triggering of Article 50 and the most recent general election that the market could get spooked again, this did not happen.
“We were nervous, we thought after the irrational nonsense of the referendum [could repeat] and it was irritating,” Jordison said.
As such, the manager said he believes the market is out of the woods of negative investor sentiment concerned with Brexit.
“I really believe that people are slightly embarrassed about their emotional reaction to how the referendum played out and what they did with property because a lot of people lost out,” he noted.
“They had to come out of property, pay the full spread on the way out and then re-allocate back and pay the spread again.”
As the market has turned back to fundamentals, the manager added that the UK commercial property sector looks okay.
“We try to decompose it a little bit more here by our spider chart [below]. This is loaded up with data going back to 1991 so it really is good,” he said.
Source: Columbia Threadneedle
He said the current position, shown as the dark blue line, points to a market that has a “split personality”.
“On absolute values there are no bargains and on absolute yields in comparison to historical levels it is not really looking that cheap,” Jordison said.
“Then you get into the relative yield measures and it is looking honkingly cheap,” he added, as shown by the bottom right of the chart.
“Then on the left you get the trend versus the dollar – so how many dollars buys your UK property at the moment – and that is looking super cheap.
“It’s looking reasonably good as a relative to equities and you have the cheapest debt you’ve ever seen in your life.
“Cheap debt at conservative levels is available in abundance and that contributes to something that doesn’t feel overbought. It is not the biggest bargain I’ve ever seen – but this ain’t an overbought, overvalued market and we are quite happy with that.”