Property fund sector to receive shake-up

Following a review it was decided that sector should be spun off into two new categories: UK Direct Property and Property Other.

The Investment Association (IA) has announced plans to split its Property category into two new sectors from the start of September.

Following a review it was decided that sector should be spun off into two new categories: UK Direct Property and Property Other.

The new UK Direct Property sector will be composed of funds that invest directly in UK bricks and mortar property, both residential and commercial, as well as student accommodation, leisure and healthcare assets.

To qualify for the new category, funds will need to commit 70 per cent or more of their portfolio to direct property investment over a five year rolling period. Funds that invest less than 70 percent of their assets in direct property for any continuous 12-month period or fall below 60 per cent for any month risk being removed from the sector.

To be included in the new Property Other category a fund must have over 80 per cent of their holdings in property-related shares, such as homebuilders or property development companies, or a mixture of direct property and property shares totalling 80 per cent of their portfolio.

Alternatively, funds that invest an average of at least 70 per cent of their assets directly in property. Those that fail to do face being kicked out of the sector.

The IA’s Property category has long been a cause of concern. Commenting on the news of the split Darius McDermott, managing director of Chelsea Financial Services, noted: ‘For too long it has been impossible to compare funds within this sector given some are physical property and some are property equities.’

The split should now make comparisons between funds in the same sector easier. As Adrian Lowcock, Investment Director of Architas, noted: ‘I think this is a good result as there are significant differences between property shares and direct property which an investor might want to capture or avoid.’

According to Lowcock, splitting the sector will help investors more quickly focus on the area they want to invest in and avoid funds which do not meet their criteria.

He added: ‘The main aim looks to have been to differentiate the direct property funds, which have in the past suffered from liquidity issues, from those of equity linked property funds and I think this has largely been achieved, improving the journey for investment selectors.’

The wide range in difference between funds comparing Kames Property Income, which has 74 per cent of its portfolio in direct property, and First State Global Property Securities, which holds over 70 per cent in shares or REITs. Both were previously classified as part of the same Property category.

 

As the chart above shows, performance between the two are very different. First State’s equity focused fund is both more volatile and correlated to global equity movements. At the same time, the liquidity issue of direct property funds can be seen by Kames Property Income’s large dip following the June 2016 Brexit vote

However, despite the improvement, the Property Other sector may still need some clarification, according to Lowcock. ‘The categories might need some adjustments over time, such as reviewing the inclusion of specialist direct property funds, but this should be an evolution not a revolution,’ he noted.

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