Recession could prove another double-whammy – depressing values further and leaving landlords with empty letting space.
After pumping £6.5bn into property funds in two years, investors have withdrawn almost £1bn of their money. Overall, Association of Real Estate Funds figures show funds under management have shrunk by £10bn from their peak.
Fund managers are fire-fighting, ditching poor performing property equities and tarting up buildings to retain tenants.
Philip Nell at the giant £2.5bn Norwich Property Trust has slashed property equities from 16% to just 0.1% of his portfolio. In the last year, his equity holdings collapsed 64.74% in value, far harder than corresponding falls in the FTSE EPRA/NAREIT UK benchmark.
A recent fund factsheet warns that the value of properties could fall again too, saying ‘the risk of a second phase of re-pricing of property is increasing’.
In other words, investors should expect further losses.
A rally in property equities normally indicates a forthcoming return to form for bricks and mortar, as shares can react faster to positive news.
"There were glimmers of hope in March but less so now. We are waiting for the right triggers to start buying again," admits Jason Baggaley of the Standard Life Property Income Trust.
Standard Life Property Income Trust
New Star was an aggressive advertiser in the boom years. Marcus Langlands Pearse, director UK property, denies its UK Property fund paid over the odds for some properties and says returns are still reasonable. With just 2% of the portfolio unoccupied, he believes it can weather the trough.
"It sounds odd but there will be plenty of opportunities too. There is a wall of international money waiting to invest. We want to build a money pot over the next 12-18 months."
An industry panel surveyed by REITA, the Real Estate Investment Trust trade body, predicts further negative returns for 2008, although 27% of its experts bravely suggest recovery could come before the year is out.
Mark Dampier of Hargreaves Lansdown thinks they are wrong.
He was a lone voice of dissent as the property asset bubble grew, frequently at loggerheads with fund managers in the national press. His pessimism seems vindicated and he remains deeply sceptical.
"Do not touch property funds with a barge pole," he warns.
"In the worldwide crunch, cash has evaporated. As residential and commercial property both depend heavily on leverage, if you cannot borrow it all unravels."
With property fund yields slashed to around 6%, he asks: "If I can get 5.3% on gilts completely risk free, why bother with property?"
Dampier warns against buying property as a portfolio diversifier for the next two to three years.
"The problem is not interest rates, it is the supply of money and we are in for a difficult time. You are not diversifying cleverly if the asset you are buying is not cheap."