Trying to predict the future direction of most investment asset classes (except ‘cash’) is notoriously difficult, if not totally impossible.

If, for example, it could be easily and confidently predicted that equities will rise in value over the next few months or years they would have already risen by now as market prices are not so much driven by current valuations of shares but by the projections of future prospects.

Government Bond and corporate bond markets are also unpredictable, albeit usually to a lesser extent.

But property funds are a very different matter!

First, it is important to clarify the difference between property funds which are invested in shares in the property sector and property funds which are invested directly in commercial property.

The performance of property funds invested in equities will, tend to closely follow the performance of equities and, therefore, are as unpredictable as any other equity-based funds. These funds are not the subject of this short briefing.

But property funds investing directly in property?

Well….that’s a different matter altogether!

Commercial property funds benefit from regular rental income from tenants with long term leases. This rental income ceases during periods where the leases come to an end and tenants don’t renew, or where the tenants ‘go bust’ and can’t therefore pay their commitments under the lease. Well, that’s just what has been happening over the last couple of years.

Worse, property funds can’t buy and sell property with the same speed that equity funds can sell equities. Transactions can take many months or years. Un-let and unwanted properties in the current market are difficult or impossible to sell, so property funds are already sitting on an increasing number of un-saleable assets. These are, a liability on the fund as their value continues to fall yet certain costs such as maintenance and insurance continue to rise.

Even worse, many or most property funds are already involved in ‘new build’ projects to which they committed themselves months or years ago and which now stand unfinished or un-let.

It is widely acknowledged by people ‘in the know’ in the property fund market that property funds, having suffered terrible losses, look highly unlikely to turn the corner for many months…or even years! The Pensions Office has, for almost two years, been recommending our clients ‘cash in’ their property funds and transfer the proceeds to other asset classes. Most took our advice, especially after our continued reminders, but those who didn’t have lost out badly. For almost a year we have been strongly recommending new transfer clients do not direct any money in property funds. Not yet, anyway.

If you trust your pension fund to the advice and recommendations of The Pensions Office you will receive the same advice as regards this asset class. Just as importantly, when property funds do ‘turn the corner’ their uphill rise will almost certainly be just as predictable as the fall.

So, if you want to stay ahead of the game….