Advisers warn UK savers on property funds´ allure

Fund providers may be looking to offer equity-shy investors more products which are linked to property this year even though Britain´s property market could be near its peak, say financial advisers.

Retail investors who have seen property funds among the few investments to chalk up gains over recent years could run the risk of buying this asset class at the wrong time - just as they did with technology stocks at the height of the equity boom, advisers warn.

Fund companies may roll out some new tax-advantaged individual savings accounts (ISAs) over the coming months to tap retail investors' enthusiasm for property. However citizens need to be careful, said James Dalby, of Bates Investment Services, an independent financial adviser (IFA). "Most of the steam is running out of this asset class. You should not chase it relentlessly," Dalby told Reuters.

Ordinary investors should think about the long-term prospects for investments not chase assets that have done well in the recent past, he said.

"I think, more than ever, that we need to break that cycle of behavior," Dalby said.

Amid a sea of red ink, real estate has been one of the few asset classes to have garnered positive returns for fund investors. In 2002 the property fund category measured by fund tracker Lipper returned a 4.58% gain, the fifth-best achievement for any fund type last year.

Only bonds and index-bear funds did better than property. On average, equity funds fell 24.23% last year, with equity funds taking the brunt of the punishment, the Lipper data showed.

The private investor remains bullish on property and gloomy about the stock market outlook. A monthly survey of investor sentiment by JP Morgan Fleming showed 60% of those polled in mid-December forsaw higher property values over the next six months. Only 23% forsaw higher stock prices.

On Wednesday the Confederation of British Industry (CBI) reported that demand for commercial property held up well in the second half of 2002 but was expected to slow slightly in first half of this year.

Dalby reckons some fund firms may tap into this demand during the forthcoming 'ISA season', the period up to the end of the British fiscal year in early April. "We may see some companies coming out with some [property funds]," he said.

Not many options
Investors looking for property-based retail funds have few options open to them. There are currently only three British-based unit trusts investing in real estate - Aberdeen Property Shares, Edinburgh Portfolio Property and the Norwich Union Property Trust. All three funds invest in commercial rather than residential property.

There are other funds investing in property but these are normally based offshore for tax and regulatory reasons, Bates´s Dalby said.

Property funds typically carry higher annual management fees than equity or bond funds because it is more expensive to shift property assets due to tax, legal conveyancing costs and the time normally required to buy or sell a property, he said.

Britain's three retail property funds charge an annual management fee averaging 1.42 percent of assets, while the average charge for funds in the UK All Companies Sector is 1.19%, according to data from the Investment Management Association (IMA).

Property is an important asset class and should be considered as part of a portfolio, but investors should be cautious because values have surged so far already, said David Bitner, head of product operations at MarketPlace at Bradford & Bingley, a large IFA.

"The outlook for property has certainly changed over the last 12 months from being fairly bullish to more neutral," Bitner said.

Away from the funds arena, investors who have tried to tap the property sector through acquiring real estate for rentals have seen yields squeezed in recent months. Soaring house prices have outpaced rental income so yields on buy-to-let investments are not so attractive now, Bitner said.

Source: Reuters

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