Latest developments in the property market
On this page, we explain:
- why there was a further drop in our property fund prices on 4 March
- the view of our recently-appointed property fund manager, AEGON Asset Management, on the outlook for the property market
- plans for a customer mailing that we’ll shortly send to everyone who has an investment in our property and connected funds
You might already know that sentiment towards the UK commercial property market has been negative since summer 2007. The IPD Index has fallen every month since August. Property funds have been faced with greater numbers of sellers than buyers, which means that we, along with several other providers, are deferring certain withdrawal requests.
Our Property fund prices
The most recent valuation of our property portfolio showed that values had dropped from the previous one. This meant that the price of the pension and life Property funds price fell by just over 9.4%.
The prices of the Select Distribution and Select Reserve funds, which invest a proportion in the Property fund, were also affected – though by less than the property funds.
We realise that a further drop in prices will concern you and your clients. Like other investment markets, the UK commercial property market is enduring a challenging period currently. It’s important to keep in mind that a loss is only crystallised if money is taken out of the fund.
Valuing the Property fund
The Property fund itself remains well diversified in the UK geographically and by business sector, with an occupancy rate of over 97% and average lease length of over 13 years. In addition, the fund is underpinned by a solid rental stream and the yield has increased to over 5.6%.
We believe it’s important that the valuation of the fund is realistic so that the unit price is fair to all investors in the fund. We use an independent firm to value the portfolio of properties in our fund. The valuations are based on many aspects, including rental income, levels of occupancy and type of tenant.
In addition, market sentiment plus market data on recent sales of properties is taken into account. A key influence on the valuation is the number of transactions involving similar properties that have taken place. Transactions increased from mid-December, with prices generally favouring buyers and values are reflecting that.
The drop in the fund price doesn’t mean that all properties have fallen by the same amount. The factors that have contributed to the recent valuation change are:
- Certain sectors such as west end offices, retail warehouses and distribution property have been hit harder than others. The fund has a relatively high exposure to these sectors.
- Buyers are demanding a higher yield for certain properties. Similar to fixed interest securities, when a greater yield is required, capital values will fall.
- The fund is invested predominantly in prime properties, which typically have lower yields. The demand for higher yields means that the values of prime property have fallen by a greater amount than other properties.
Outlook
We appointed AEGON Asset Management as the new manager of our property funds on 11 February 2008.
Until that date our property funds were managed by Morley Fund Managers. However, in July last year AEGON Asset Management recruited a highly regarded and very experienced property fund management team. David Wise, Gerardine Davies and Philip Clark have over 60 years’ experience of managing commercial property.
Since their appointment, the new team has focused on building AEGON Asset Management’s property capability through recruitment of various experienced property specialists, including a team of asset managers. Property experienced a strong bull market until the middle of last year. We believe the new team has the experience and skills to deliver competitive returns throughout different market conditions. We’re delighted that we’re now in a position to take advantage of this considerable capability from the manager of our in-house funds.
David Wise will be the lead manager and below gives the team’s view on the outlook for the market:
- The market generally is starting to look attractive from a yield perspective. The fund in particular is well positioned at an initial yield of 5.6%, with the prospect of this rising as rent reviews occur.
- The team believes the worst of the decline is over although it may be too early to call the market low point.
- It feels that in the absence of an economic shock, on a five-year view property looks more attractive than it has done for many years.
- Interest rates are starting to fall, which means property becomes more attractive to buyers who need to raise finance.
- The exposure to prime property will benefit the fund when the market recovers.
We believe firmly that the fundamentals of property as part of a longer-term diversified portfolio remain intact. The market correction may continue in the short term, but the outlook is improving. Capital values are adjusting and yields have increased as a result.
Property returns until summer 2007 were driven primarily by capital growth, with income being a less-significant contributor to overall returns than in the past. Valuations are going through a period of adjustment to the point where income will account for a greater share of total returns.
Customer mailing
We’ll shortly be writing to all customers invested in the life and pension Property, Select Distribution and Select Reserve funds to explain that certain withdrawal requests may be deferred. The letter will also confirm the maximum deferral period that would apply to each customer if they decided to make one of the withdrawal requests affected. Please click here for a sample copy of the letter.
When we first announced the deferral, we emailed advisers to explain the decision and to allow a period of time for appropriate advice to be given to clients. Although we’re writing to everyone with an investment in property, the letter is primarily aimed at any of our customers who aren’t in regular contact with an adviser and may not be aware of the deferral.
