IFAs should avoid office exposure and blind pool funds, says gullwing
Gullwing Asset Management, which is currently raising assets for a property fund launch, has released a checklist of the areas advisers should analyse when comparing property funds.
The 13 bullet point list covers the investment proposition funds offer. Michael Lynn, managing director of Gullwing, said the risk of many property funds currently being marketed has not been fully realised.
He added: 'As the stock market continues to flounder, more investors are including a real estate element to their portfolios. We believe they should look to have 10%-25% of their pension fund in bricks and mortar.
'However, we urge private investors to consider the property fund they select carefully in order to benefit from healthy future investment performance. This is particularly important as prospects for the retail property sub-sector are much stronger than offices.
'Investors should also beware of blind pool funds that will invest later in some non-specified assets as investors need to know what they are buying.
'We have also seen examples of inadequate disclosure of occupational lease terms, some of which may be close to expiry. This may mean the assets of the fund are not investment grade.
In some cases, investors are being offered commercial property funds dominated by a single asset or that have too heavy a weighting towards the London and Southeast office sector.'
The checklist contains 13 points covering the quality of the underlying portfolio and the strength and track record of the fund's management team. It suggests advisers look more closely at the charges they are being asked to pay and the fund's tax position.
The checklist also examines the key aspects of risk in a property portfolio and indicators that risk levels are higher than marketing material suggests.
checklist for advisers investing in property funds
1. Location of property/nature of asset or assets:
Is it a single asset or a well balanced portfolio of assets? Is the fund geographically diverse or is there too much focus on London/South East?
2. Retail vs offices:
What is the sector split within the fund? Retail, leisure and industrial sectors are expected to grow over the next four years but there is concern over declining rents and values in offices for the foreseeable future and general oversupply, particularly in London and the Southeast. Offices are currently the worst performing property sector.
3. Track-record of fund managers:
What experience do they have? Do they have the range of skills required to run a fund?
4. Corporate governance:
Are there adequate checks and balances in place to ensure the fund is properly run? Is there an independent advisory board?
6. Quality of advisers:
What lawyers, valuers, property managers and letting agents are involved?
7. Length of tenant leases:
How long are the occupational tenancies? They should be as long as possible. How many years will remain on tenant leases when the fund ends? There should be at least 15 years remaining for the asset to be investment grade and therefore saleable on best terms. Beware of short-term occupational leases.
8. Quality of tenants:
Has an independent rating of tenants taken place to assess quality?
How much growth is expected in the property sub-sector concerned? Indexation is particularly valuable in a low inflationary environment.
Property is not a liquid asset class by nature. But there should be some provision to cater for deceased or distressed investors during the life of the fund. If investors require early redemption, what penalties are there?
11. How does the fund charge investors?
Front-end, annually, performance fees. Investors should be aware of high charges. This sometimes occurs through double charging by way of feeder funds.
Up to 75%. Any higher than that is dangerous.
Some are geared as high as 85%.
13. Tax/corporate structure:
Is it appropriate to investors' needs?
Source: Gullwing Asset Management
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