International property holding up the fort

Global property funds suffered a hard hit in 2007 as a result of jittery stock markets and a breakdown of confidence in the UK commercial property market.

The sharp shift in investor sentiment towards British property during the year led to a wave of unit trust redemptions and prompted a sell off of property investment trusts. Most commercial property funds, whether UK or globally focused, are now nursing hefty losses while their listed counterparts are trading on large double digit discounts.

Despite this, experts argue that fundamentals in countries outside the UK remain in many cases supportive of commercial property. They believe the recent setback is an unfair representation of the property potential in, for example, parts of Asia and Europe, where markets are in an earlier stage of the cycle to the UK.

Nick Greenwood, chief investment officer at iimia Investment Services, says the mark down among investment trusts focused outside the UK does not reflect accurately prospects in some international markets.

“Anything listed in London with a connection to property has been slammed, which is fair enough if the fund is invested in overblown markets such as the UK, US, Spain or Ireland. But it’s a bit harsh for trusts invested in property markets which are at a totally different phase of the cycle.”

A number of trusts Greenwood holds in his iimia Growth and iimia Accelerated funds are now trading on very tempting discounts. For example, the Alpha Tiger trust, which invests in commercial property in India, is trading on a 16% discount; Develica Deutschland, which invests in the German commercial market, is trading on a 28% discount; Dolphin, a trust investing in residential property and resorts in Greece and Turkey, currents stands at a 42% discount.

The recent loss of confidence will have been particularly painful for the dozens of global property unit trusts that have launched in the last year or two. With property now regarded as a separate asset class sitting alongside equities, bonds and cash in investors’ portfolios, fund groups have been eager to provide a property alternative for those withdrawing money from UK funds.

Unfortunately for fund groups, almost all the global funds launched within the last year now sit on losses. Figures from Trustnet show some funds launched within the last 12 months have lost over 20% over six months to December 18, although, as with investment trusts, some might see such sharp reductions in unit values as a buying opportunity.

One of the few new global funds that has avoided losses recently is the New Star International Property fund, launched last June. Over six months to December 18 the fund has returned just over 3%, according to Trustnet figures. Only one other onshore property fund focused outside the UK, the ARC European Property, also managed to make money in that period returning 10%. Among offshore global property funds the picture is similarly gloomy.

Stuart Webster, manager of the New Star International Property fund, believes plenty of opportunities for returns lie in the Asia Pacific region. His favoured countries include Japan, Australia and Singapore, where growing interest from international investors is strengthening demand for commercial property.

“In Asia-Pacific, economic growth and property returns are likely to be generally higher than in Europe in 2008. Prospects are strong, with investor confidence growing and overseas investors making an increasing number of purchases.”

Some, however, believe the best returns have already been made from international property and that investors are simply jumping on another property bandwagon. Being conscious of which countries the fund invests in and why will be critical in such an environment.

Simon Gibson, director of financial advisers Atkinson Bolton, says he believes global property funds still offer the potential for good returns but agrees that the best may have already been and gone. He adds that he prefers funds that invest in bricks and mortar to those that invest in property shares.

“We are very much more relaxed about overseas commercial property [than UK property], although the stellar returns may have been had.”

1 January 2008