Life and pension property prices
Over the last few months, the UK commercial property market has experienced a marked change in sentiment from positive to negative. This has resulted in valuations falling recently.
We believe it is important that the valuation of the property fund is fair to all investors and reflects the continued negative sentiment. As a result, we undertook an interim assessment of the fund valuation and this was lower than the previous one. This change has been reflected in the unit prices of our life and pension property funds. The life fund price fell by 6.45% while the pension fund price fell by 7.75%. The prices of the Select Distribution and Select Reserve funds which invest a proportion in property were also affected though by less than the property falls.
We realise that the drop in prices will be concerning for you and your clients, however it is important to keep in mind that a loss is only crystallised if money is taken out of the fund. The 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 twelve and a half years. In addition, the fund is underpinned by a solid rental stream and the yield has increased to just under 5%.
We believe firmly that the fundamentals of property as part of a longer term diversified portfolio remain intact. The market is undergoing a correction after a number of years when returns were higher than long run expectations. Capital values are adjusting however yields have increased as a result. Property returns until summer this year 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.
