The Rent Review Specialist
Property Funds
Investment - indirect
Whether you invest direct or through a property fund manager, the same principles and the same approach to appraisal will apply. The fundamental question is whether the property has the potential to become an investment, or whether you are simply buying a property that is or could be let.
In my opinion, property funds are the ‘first-time buyers’ of the institutional property market. A property fund is a product of the financial services industry and is designed for the express purpose of generating fees for fund managers and shareholders of the parent company. When the mood of the moment (market momentum) is for commercial property, funds are launched, investors lured, and properties bought, regardless. As soon as the mood changes, and investors want out, the funds either put a stop to that or reduce the value of the investor’s holding. You might not think there is anything wrong with that, but in my opinion, it shows a lack of foresight to buy on the mood of the moment because by then prices would have risen already.
Although property fund hype is that it is better to pool relatively small sums of money so as to afford more, (an approach that ensnares private investors hook-line-and-sinker) that view is only true when what the fund buys is worth buying. Generally, as I have said, what funds buy is rarely worth buying. Few institutional investors are shrewd: most are under the impression that because they are institutional they are better equipped to appraise propositions, but that is not necessarily so. At every entry point to the market, and in every price range, there are some that know what they are doing, and some that think they do, and plenty that really have no idea but don’t want to admit it.
In 1984, in my newsletter I quoted Hugh Jenkins of the National Coal Board Pension Fund saying of chartered surveyors “(they) will be continue to be regarded with cynicism, so far as their professional capabilities are concerned, as long as they cling to gut feeling about growth prospects without being able to back them up with fundamental research.” When I suggested the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. Gut-feeling is an essential ingredient in the evaluation of research. You can only draw conclusions from information if you can adopt a broad view. It is not the result of research which provides a span of information, but the questions gut-feeling invite you to ask. Furthermore, since many fund managers are comparatively young, with no real experience of the market long-term, let alone much if any experience of having started a business from scratch, they can suffer from over-reliance of what they are told and their interpretation. In other words, you are not actually investing in property through anyone that actually knows what they doing, so much as being led to believe they do!
Research minimises risk in the hope that, while short term deals may be lost, the long term might bring substantial reward. But limitations of research can bring their own problems. It is a feature of professionalism that the combination of knowledge and experience clashes with logic, except in cases of absolute certainty. If you have to invest, then you are going to become increasingly frustrated if your adviser’s research tells you not to buy, when all about you, others are busy spending and getting all the kudos and excitement, That does not make the advice wrong, since investment is a waiting game (which means it’s boring), but it does nothing for the sale of lucrative financial products, which is why funds overpay.
In a downturn, property funds are very good at blaming the state of the market, but the state of the property fund is a reflection of the attitudes and policies that drove the fund to buy the investments in the first place. What one has to realise, I suggest, is that just because property funds are managed by people that one would reasonably must surely know what they are doing doesn’t mean they do.
Having said all that I am not scathing of all property funds; I think there are some that are obviously have their wits about them. The question is whether you, whose money is wanted, are able to sort the wheat from the chaff.
In my opinion, property funds are the ‘first-time buyers’ of the institutional property market. A property fund is a product of the financial services industry and is designed for the express purpose of generating fees for fund managers and shareholders of the parent company. When the mood of the moment (market momentum) is for commercial property, funds are launched, investors lured, and properties bought, regardless. As soon as the mood changes, and investors want out, the funds either put a stop to that or reduce the value of the investor’s holding. You might not think there is anything wrong with that, but in my opinion, it shows a lack of foresight to buy on the mood of the moment because by then prices would have risen already.
Although property fund hype is that it is better to pool relatively small sums of money so as to afford more, (an approach that ensnares private investors hook-line-and-sinker) that view is only true when what the fund buys is worth buying. Generally, as I have said, what funds buy is rarely worth buying. Few institutional investors are shrewd: most are under the impression that because they are institutional they are better equipped to appraise propositions, but that is not necessarily so. At every entry point to the market, and in every price range, there are some that know what they are doing, and some that think they do, and plenty that really have no idea but don’t want to admit it.
In 1984, in my newsletter I quoted Hugh Jenkins of the National Coal Board Pension Fund saying of chartered surveyors “(they) will be continue to be regarded with cynicism, so far as their professional capabilities are concerned, as long as they cling to gut feeling about growth prospects without being able to back them up with fundamental research.” When I suggested the modern concept of professionalism removes initiative, several advisers on motivation and corporate strategy agreed with me. Gut-feeling is an essential ingredient in the evaluation of research. You can only draw conclusions from information if you can adopt a broad view. It is not the result of research which provides a span of information, but the questions gut-feeling invite you to ask. Furthermore, since many fund managers are comparatively young, with no real experience of the market long-term, let alone much if any experience of having started a business from scratch, they can suffer from over-reliance of what they are told and their interpretation. In other words, you are not actually investing in property through anyone that actually knows what they doing, so much as being led to believe they do!
Research minimises risk in the hope that, while short term deals may be lost, the long term might bring substantial reward. But limitations of research can bring their own problems. It is a feature of professionalism that the combination of knowledge and experience clashes with logic, except in cases of absolute certainty. If you have to invest, then you are going to become increasingly frustrated if your adviser’s research tells you not to buy, when all about you, others are busy spending and getting all the kudos and excitement, That does not make the advice wrong, since investment is a waiting game (which means it’s boring), but it does nothing for the sale of lucrative financial products, which is why funds overpay.
In a downturn, property funds are very good at blaming the state of the market, but the state of the property fund is a reflection of the attitudes and policies that drove the fund to buy the investments in the first place. What one has to realise, I suggest, is that just because property funds are managed by people that one would reasonably must surely know what they are doing doesn’t mean they do.
Having said all that I am not scathing of all property funds; I think there are some that are obviously have their wits about them. The question is whether you, whose money is wanted, are able to sort the wheat from the chaff.