Investors who have already hurt by property fund repricing to cope with mounting withdrawals could be in line for further pain when battered retail assets are revalued, Hawksmoor fund manager Ben Conway has warned.
The manager avoids open-ended property funds, preferring real estate investment trusts, arguing one of their ‘big negatives’ was the potential for ‘swing pricing’ when ‘the funds go from an offer to bid basis in order to protect investors from changes in property prices’.
Investors in Threadneedle's £1.5 billion UK Property Authorised Investment fund and Kames Capital's £711 million Property Income fund were dealt such a blow in December, shouldering respective hits of 6.1% and 5.7% as the funds' pricing was moved from a 'offer' to a 'bid' basis. Columbia Threadneedle has since implemented pricing changes to its property fund, widening the spread between the 'buy' and 'sell' price to avoid the need to 'swing' pricing.
Conway said these pricing moves created ‘a big chunk of volatility all in one go’, but warned investors in property funds who had taken these sorts of hits were not out of the woods yet.
Conway pointed to the valuations of the assets held by property funds, which, as they are traded infrequently, are unlikely to reflect the full impact of the downturn in UK high street retail.
‘It you look at open-ended property funds, you can see how much exposure they have to the retail sector, even those that have swung their price – it doesn’t mark the end of volatility in this sector.
‘When buildings they own start to be priced accurately – when surveyors adjust them downwards – then there is a lot of stored up potential downside volatility in open-ended property funds' net asset values (NAVs).’
Hawksmoor only invests in closed-ended property funds or real estate investment trusts (Reits). Unlike open-ended property funds, he said the prices of the shares in these closed-ended funds reflected the plight of the assets they invest in.
‘Reit prices, especially in retail, are a long way from NAV because investors are expecting those NAVs to come down sharply once surveyors have updated their valuations,’ said Conway.
Despite his warnings over the retail sector, Hawksmoor has added Supermarket Income Reit (SUPR) to its holdings list.
Conway (pictured) said it was a ‘very specific case, more like a logistics play’, which the group had watched since its flotation 18 months ago.
‘We took part in the current placing after management proved the model and [the trust was] fully invested,’ he said.
The Reit is buying large supermarkets, including those run by Tesco, Sainsbury’s and Morrison, that are operating as more than supermarkets, he said.
‘They are being used as hubs, not only for [the supermarket’s] own internet provision but others' click and collect [services], they have cafes and drive-ins... [the trust] is really sweating the assets... that enhances the return it can receive,’ said Conway.
The manager said the Reit should also capitalise on supermarkets' wrestling of greater control over their balance sheets, pointing to Tesco's improving debt profile, with bonds that had been deemed sub investment grade now attracting a higher rating.
‘This means it can borrow more cheaply in the bond market and there is every chance it will buy back its supermarkets from the likes of Supermarket Income Reit,’ he said.
‘Supermarket Income is buying these assets off pension funds and insurance companies that bought them from Tesco and Sainsbury’s over the last 10 years when they were doing sale and lease-backs. It’s gone full circle.’