The Issues
It is clear that a major re-evaluation of commercial property values is taking place at the moment and most of the traditional bricks and mortar funds are under pressure from a liquidity perspective as investors seek to reduce holdings.  In particular we know that Norwich Union have moved to bi-weekly valuation and have a low liquidity level in the fund.

Most funds including NU, New Star, M&G and Standard Life have moved their pricing basis to protect the current holders if funds flow out.

The latest valuations all have a negative effect on the fund values and some are down between 15-20% over the last year. The current view is that this negativity will continue into 2008 but how long we don’t really know.

Some observers, notably Gartmore in the recent press, have suggested the timing may be right to look at re entering the market as the area is beginning to look oversold.

The cause of the re-evaluation is linked to demand and whilst we have not heard that rental values are falling (indeed the opposite is true) capital to fund purchases has reduced since the credit crunch has struck global capital flows. Fewer prospective buyers have been entering the market reducing demand. This is not the only cause but a major instigator of the re-evaluations.

The Effects
The concerns of investors and the reaction to the falling valuations has been more extreme than was anticipated and this has caused the increased outflows.

We would maintain however that these fund managers have not suddenly become poor managers of property nor have the underlying assets become poor value in terms of occupancy rates and rental income values.

As is usual with any bubble it had to end at some point and it did so as the sector became the most popular for retail inflows. We remain cautious about returns from UK funds in 2008 and we may see funds having to close due to liquidity concerns on a temporary basis.

Over the longer term our view is that property has probably been oversold during the downturn, as it was over-bought on the way up, but that it is still a great diversifier.

We will probably not see the growth in capital come back for twelve to eighteen months but in a balanced portfolio we would still recommend a portion in property.

Conclusions
Advisers and investors should try rise above the noise of the market and current trends and continue to use property investments as a long term investment to diversify a portfolio, but reduce exposure in overweight positions.

We should look beyond bricks and mortar in the UK for our overall property holdings – perhaps including property securities although these are more closely linked to equity style price movements.  We should also consider international property holdings – in particular the Asian and European property markets look stable and able to support solid rental growth in 2008. Funds such as New Star International Property fund and the Schroder Global Property Securities fund should be considered for widening the diversity of a property portfolio.