UK Property
1st month of property fund inflows this year
Latest data on property funds show inflows in September for
the first time this year. Normally these flows correlate with
NAV valuation in the listed sector, but this relationship has
recently broken down, as we show.
Property funds saw inflows in September, for the first time this year. Flows into
retail property funds were mildly positive in September, totalling £100 million,
as per data from the IMA (Exhibit 1). This follows a flat showing in August, £0.8
billion outflow in July, and £1.5 billion of outflows in June. So far this year, nearly
£3 billion has been withdrawn from these funds.
Previous months' outflows have been unprecedented. 2016 outflow levels have
been unprecedented; we experienced a quarter with £0.5 billion of net outflows
in the run-up to the global financial crisis (1Q07), and the worst quarter during
the crisis was 4Q08 with a total of £0.3 billion of net outflows (Exhibit 3), which
is nothing like what has happened in 2016.
Some funds have reportedly been cancelling sales as a result. An article in the
Financial Times earlier this week highlighted that some UK open-ended funds are
no longer trying to sell some of their central London buildings as investors have
started putting money back into the sector. It highlights Zurich's Property Fund,
managed by Columbia Threadneedle, which has halted a £100 million sale of
two office buildings in Camden after receiving bids to buy them; while Blackrock's
UK Property Fund has scaled back a portfolio sale known as Project Rio from
£200 million to £85 million following a return to inflows, the article said. Neither
company has commented on the article.
Is search for yield trumping Brexit risk? Spreads in the listed sector vs bond
yields are now at historically wide levels (see Exhibit 4 and Exhibit 5). On an
absolute basis, this has historically been a good moment to invest in the listed
sector, as our backtest shows (Exhibit 6).
Normally flows are correlated with NAV valuation. Normally, outflows from
property funds correlate with NAV valuation in the listed sector. Unless this
inflow month turns out to be a one-off (possible – note that sterling weakness in
October is not captured in these figures), we think this should support NAV
valuation, which is already close to trough levels in a historical context.