How can you tell if an asset class is over-valued or even experiencing a bubble? The number of fund ...
How can you tell if an asset class is over-valued or even experiencing a bubble? The number of fund launches probably gives as good an indication as any other. Whereas a year ago new funds were dominated by hedge funds, they have been usurped by property in the past few months.
Property funds are not content to focus on core markets like the UK, Western Europe or the US. Recent launches have covered Eastern Europe, the UAE and Shanghai. This is both a sign of investors and managers searching further afield for higher returns and that the bull market in property has occurred in most parts of the world.
Most funds invest in commercial property rather than residential and there are a number of reasons given by managers for why they offer a compelling investment case. These include institutional investors increasing their weightings after years of low allocations and the asset class previously being under-valued. A further boost is being provided by the growth in Reits around the world.
The crucial question is how sustainable the bull market in property is. In the UK, for example, commercial property returned 18.3% in 2004, the majority of which came from growth in capital values. But historically, rental income has supplied the bulk of the returns.
The IPD's pan-European property index delivered a total return of 10.4% in 2004, of which 4.6% came from capital growth. In contrast, the index returned 7.4% in 2001, with just 1.1% coming from capital growth.
Fund managers argue that property is attractive because of its low correlation to equities and the diversity within the asset class that usually enables them to find value.
But it can pay investors to take a contrarian approach to investment. Should investors buy into an asset class after strong returns have already been made and fund managers are attempting to capture the resultant large inflows? In contrast, a successful strategy might be to buy when everyone is selling and sell when everyone is buying.
One only has to go back to the TMT bubble in the late 1990s to see how investors forget that asset prices can go down as well as up. As Sir John Templeton once famously observed: "The most dangerous words in investing are - this time it will be different." It is not necessary to go very far to see the risks. Japan has just suffered its fourtenth consecutive year of a fall in property values.
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