Multi-managers are becoming increasingly wary of open-ended property vehicles, warning many funds are struggling to put to work the recent influx of cash into the sector.
Property was the top selling IMA sector for the second month running in November, with the £417m net retail inflow the highest recorded since £467m in March 2007.
However, the sharp inflow has prompted a number of multi-managers to be concerned about how quickly these funds can invest the money - leading them down the closed-ended route.
"While property funds saw large redemptions to April last year, they now have to deal with the difficulty of investing fast-growing cash levels, inflated by the sudden surge of new inflows," OPM business development manager Richard Carswell says.
"The risk for investors in bricks and mortar funds is they have had large inflows, but how will they invest all that money?"
Carswell believes should cash balances in property funds rise too high, investors could start pressuring groups to cap the vehicles.
Meanwhile, Premier Multi-Asset Growth fund manager David Hambidge has recently added a position in the £753.4m F&C Commercial Property trust.
"We looked at the open-ended vehicles very carefully but our concern is the amount of cash going into them at the moment," he says. "The other advantage is a trust can be 100% invested in property."
Chelsea Financial Services managing director Darius McDermott agrees some property funds may be finding it difficult to acquire enough high-quality properties to satisfy inflow levels.
"There are a number of large funds out there which were sitting on upwards of 40% cash weightings late last year and have been somewhat forced into buying large portfolios," he says.
"Whether these funds truly wanted the entire portfolio they acquired or just parts is a good question at this point in time.
"All of this leads us to prefer the smaller and more nimble open-ended funds which already have a strong established portfolio."
McDermott believes investors looking to diversify into property should not be looking at closed-ended vehicles however.
"Investment trusts get around the problems such as inflows, but for true diversification I believe they behave too much like the overall equity markets under extreme stress," he adds.
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