Brexit & the Markets: Property & Alternatives
Commercial property returns have slowed over the quarter, as concerns over Brexit have led to outflows. Following the vote property funds responsible for over £14bn in assets have suspended redemptions with others reducing their dealing prices significantly. The actions were taken over the concern of investors redeeming their investments in fear over a property crash. This action is following the majority of property funds moving their pricing to “bid” indicating that they have been/ expect to have outflows from their funds. This initially resulted in a 5-5.5% fall in the price the funds trade at the point in time. Furthermore, following the referendum, funds have repriced units to reflect the less attractive outlook for the asset class, this has reduced prices further.
A case can be made for taking advantage of the repricing as as the entry price is attractive relative to Net Asset Value. However, it is unlikely that there will be a repeat of the high level of returns experienced in the recent past. There is still a structural undersupply of property which could mean steady growth in prices. Again, however, with a Leave vote, there may well be a sharp fall in London prime property prices as some companies relocate. There is already evidence of this.
Investment Trusts/ REITs have continued to trade at a significant discount to NAV. Given the potentially weak commercial property market in the shorter term, investors are shunning these generally leveraged vehicles, preferring to take risk elsewhere. Now may not be the best time to enter into these investments, however, if a positive trend in the property market is observed then investment trusts may provide benefits to a portfolio. A narrowing or elimination of the discount, coupled with NAV growth could yield double digit returns.
Alternatives can provide a source of diversification in a a portfolio, in particular absolute return funds. There is an element of correlation that is now present across corporate bond, equity and property holdings meaning that the use of alternatives can, by their name, provide an alternative investment.
Gold and commodities have done particularly well in the last quarter, however, they are still prone to high volatility and unpredictability. Since Brexit vote gold has performed well being seen as a safe haven and may retain this strength as the US election draws closer.
You should always remember that the value of your investments and any income from them can go down as well as up and you may get back less than the amount you originally invested. All investments carry an element of risk which may vary significantly. If you are unsure as to the suitability of a particular investment or product, you should seek professional independent financial advice.