October 2020

Oct 28

The lowdown on UK commercial property funds

By FAS | Investments | No Comments

Commercial property funds have been the subject of dealing restrictions since March, with investors unable to make withdrawals or redeem their investment. But as more commercial property funds start to reopen, are they still a good long-term investment?

When did commercial property funds get popular?

For individual investors, the concept of investing in commercial property as an asset class of its own first became popular in the late 1990s. They have grown in popularity over the next couple of decades, as investors welcomed the prospect of gaining exposure to an ‘alternative’ asset class that behaved differently to equities, bonds, and cash, offering an attractive income yield and relative capital stability.

Why do commercial property funds behave differently?

Commercial property funds, that invest primarily in ‘bricks and mortar’ property assets (as opposed to equities or investment trusts that hold property) behave differently to other quoted assets for a number of reasons. Firstly, the valuation method of commercial properties is different. Whereas traded securities (such as shares) are priced at a mid-point between the price at which buyers are willing to pay, and sellers willing to sell at, commercial property is valued by specialist valuers, who factor in demand, yield, location, and economic viability of the potential tenant, to derive a value. This valuation clearly cannot take place daily, and there is therefore a lag between the price of a commercial property fund and the underlying value of the portfolio. This can lead to ‘material uncertainty’ that the value placed on each asset held in the portfolio is fair.

The other significant difference that sets commercial property funds apart is that they are often far less ‘liquid’ than other investments available to other investors. Depending on the composition of the portfolio, a period of high redemption requests may force property funds to sell assets rapidly, potentially at a sub-optimal price, and these transactions can take time. For this reason, most property funds carry a balance in cash, but sometimes these cash reserves become depleted, which can lead to a suspension of dealing whilst property fund managers realise assets to replenish the cash reserves.

These suspensions, which have been in place since March 2020, have also occurred on a number of occasions over recent years. The first time it happened was in 2008, when the global financial crisis prompted an exodus from investors. The second time that the UK commercial property sector shut up shop came shortly after the Brexit referendum. The same thing happened again in December 2019, when a small number of managers suspended their commercial property funds by invoking material uncertainty clauses that said it was impossible to get fair valuations for their property portfolios. This time, the reasons given included continued Brexit uncertainty, as well as significant weaknesses for the UK retail sector, caused by the collapse of the UK high street and the continued boom of online retailers.

What has happened this year?

The coronavirus outbreak has had a significant impact on the UK commercial property sector. Back in March, many commercial property owners were forced to give their business tenants rent payment holidays. Some premises have been empty, and a number of businesses have become insolvent or downsized their operations significantly. With the UK on the brink of a possible second ‘winter’ lockdown, and with office workers being encouraged to work from home again, the sector continues to face several headwinds and a heightened state of uncertainty about the future.

In September, valuers cleared the way for commercial property funds to begin to reopen after recommending a ‘general lifting’ of material uncertainty clauses on the valuation of most UK real estate assets. In other words, valuers now believe it is now possible to ascertain an accurate valuation of the properties held within these funds, thus allowing some commercial property funds to lift suspensions and recommence dealing.

That said, there is no regulatory requirement to reopen funds that are currently suspended and many fund managers are wary of reopening their commercial property funds too early. If investors are still determined to sell their holdings, many funds could find themselves without enough liquidity to satisfy the demand and could be forced to suspend redemptions yet again.

What could the future look like?

Aware of the growing frustration among investors who cannot access their money, and fund managers who worry that large-scale redemptions could damage the long term strategy within their portfolios, the Financial Conduct Authority is looking at proposals that would establish a ‘notice period’ of several months between the investor requesting a fund redemption and having their investment returned to them.

The premise is that this would hopefully give fund managers enough time to ensure they had enough cash available to meet the redemption, and would also discourage short-term investors from investing in an asset class that doesn’t offer them daily liquidity. Pension funds and financial institutions are most likely to remain investors, for now at least.

But are commercial property funds still a sound investment?

It is clear that the commercial property landscape has changed as a result of Covid-19. For example, City centre office space may well see decreased demand due to changes in working patterns and similarly, in the short term, hotels may continue to struggle without the traditional influx of business passengers arriving from overseas to attend meetings.

At the same time, commercial property is a broad and varied sector. There is likely to be increased demand for industrial buildings and warehouses that can accommodate a greater reliance on online shopping for groceries and other goods. So, there will be some winners as well as losers within the UK commercial property funds universe.

But at the end of the day, individual investors need to think about whether they really want to hold an investment that they may not be able to access for months on end. Whatever your view, commercial property investments are certainly becoming a more complex proposition for individual investors.

This content is for information purposes only. It does not constitute investment advice or financial advice. If you are interested in discussing your financial plans or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

Oct 21

How to protect yourself against financial scams and fraud update

By FAS | Uncategorised | One Comment

There has been an alarming rise in financial scams since the coronavirus lockdown. Here’s what you need to know about the different types of scam, and how to defend yourself.

Rise of financial scams during lockdown

According to recent research published by Barclays, there was a 66% increase in reported financial scams during the first six months of this year. And, in an effort to get around increased security measures from banks and other financial services firms, scammers are developing increasingly clever ways to persuade people to part with their personal details and even hand over their money themselves.

Impersonation frauds

One of the most popular ways is through something called ‘push payment fraud’. This occurs when the fraudster manages to convince the victim in ‘real-time’ to make a payment or transfer money from their bank account into another account controlled by the fraudster.

Here’s how this particular scam works. You receive a friendly phone call from someone claiming to represent your bank, HMRC, or a utility provider. The caller knows personal details about you, and the number they call from appears to be genuine (it could be the number on the back of your debit card, for example). The caller will tell you there has been some suspicious activity on your bank account – which means you need to open a new account and transfer all your money into it immediately.

In most instances, the first part of the fraud has already happened. Victims might have had their post intercepted or clicked on a ‘phishing’ email that handed over some of their financial or personal details to the scammer. That’s why they already know so much about you and your finances during the phone conversation.

A cunning confidence trick

The call is designed to make you feel anxious, or that you will be in trouble if you don’t take immediate action. It’s a psychological ploy, backed up with modern technology that convinces people the call is coming from a legitimate and trustworthy source. Before you know it, you’ve willingly handed over all of your money directly into the scammer’s account.

These impersonation scams were particularly prevalent during the early months of lockdown. Perhaps people were already more vulnerable than usual, had added money worries or scammers simply had more time to phish for people’s details and follow up with the impersonation part of the scam.

Investors need to be careful too

There are other impersonation scams out there to be aware of. The Financial Conduct Authority (FCA) has been warning people about the rise of “clone firms”, where criminals copy the names, websites, and literature from established investment companies and use them to target unsuspecting victims on sponsored links on search engines and through social media. Fraudsters will also ‘cold call’ investors directly, claiming to be from a company that the victim already has an investment with. In some instances, fraudsters have even set up email addresses in the names of actual staff members at investment management firms they are pretending to represent.

The fraudster will quickly gain the confidence of the investor and persuade them to make new investments or transfer existing investments. These new investments eventually turn out to be wildly over-priced, impossible to trade or they don’t even exist. Many investors only realise they have been conned when they contact the authentic investment firm to chase payments that haven’t arrived.

Pension freedoms have opened the door to fraudsters

Pensions have also become a target for criminal scams, especially since the introduction of pension freedoms that mean people can access their pensions early. People now have far more flexibility in what they do with their pension pot. For the fraudsters, this is an opportunity to get their hands on previously untapped wealth, and to rob people of their life savings.

Last month, the FCA and The Pensions Regulator estimated that more than £30 million had been lost in pension scams since 2017. Victims of pension scams, where fraudsters have managed to persuade the pension owner to transfer their pension to a fraudulent pension scheme, have lost an average of £91,000, and some unlucky victims have been robbed of more than £1 million of their hard-earned pension.

What can you do to protect yourself?

There are some common-sense steps you can take to help defend yourself against financial scammers. Here are some of the most useful ones to remember:

Don’t automatically trust an unexpected communication from your bank, HMRC or a company you’ve done business with, and don’t ‘confirm’ your personal details or agree to transfer any money.
Pay alert to messages from your bank or other service provider that ask you to click on an email link – they could be phishing for your personal details.
If you’ve been called by someone claiming to be from your bank, end the call and then phone the official bank number from a different phone (scammers can keep the line open if you call back from the same phone).
Reject ‘out of the blue’ investment offers, and remember that if something sounds too good to be true, it usually is.
Be wary of cold callers trying to flatter you, pressure you, or scare you. Don’t allow yourself to feel rushed into making a financial decision.
Trust your instinct. If something feels suspicious, report it.
Always get professional financial advice between switching investments or making changes to your pension arrangements.

Summary

The Citizens Advice Bureau warns that the most vulnerable people are often at greater risk of being contacted by a scammer. But the reality is that these are sophisticated, ruthless criminals who go to great lengths to present themselves as genuine. It’s easy to be deceived, especially when the scammers know so much about you and are preying on your personal fears. But knowing how the fraudsters operate is an important first step to ensuring you don’t give them what they want.

You can report potential scams by calling ActionFraud on 0300 123 2040, or visiting actionfraud.police.co.uk

If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.