Change to the Property fund pricing basis
Property funds have been in the press far more than usual lately, as a number have recently moved to a cancellation (also called bid or minimum value) basis. This results in the price falling from one day to the next, typically by around 7% for a directly invested fund.
Our own onshore and pension funds moved to a cancellation basis on 1 August 2007.
Every investment fund can potentially be affected by a change in pricing basis to account for cash flow. This is because there are costs involved in buying and selling investments. Dealing costs and stamp duty are the main ones for property. This reflects the market costs of buying and selling investments and isn't an initial charge or bid/offer spread that will also apply to certain policies.
When a fund is growing and has more buyers than sellers, the price is described as being on a creation (also called offer or maximum value) basis. In other words, it includes the costs of buying assets. If a fund has more sellers than buyers the price may move to a cancellation basis to protect those who are still in the fund.
This isn’t unique to property funds. Changes to the pricing basis of equity and bond funds can often go unnoticed because the buying and selling costs are relatively low. However, the relatively high costs associated with property makes any change to the pricing basis very noticeable.
We’ve experienced a trend of having more sellers than buyers so, to protect our remaining investors, we have decided to move to a cancellation basis.
We’ll keep an eye on the level of buying and selling. If the current trend changes and we have a sustained period with more buyers than sellers, we’ll look at our pricing position again. This would result in a move to the creation basis and an overnight rise in the property fund price of around 7%.
Commercial property has had a number of excellent years in succession and has provided high returns over the past three, five and 10 years. The high returns of recent years have mainly been a result of the growth in property values. Looking ahead, we expect the rental income received from the tenants in the properties to form a larger proportion of the overall return.
The arguments in favour of property as part of a broader portfolio remain as valid now as one, three, five or 10 years ago. However, if you’re concerned about the impact of this decision or the outlook for commercial property, you should speak to your sales consultant or access account manager.
