Investors in hybrid funds forced to wait and see

With the value of investment portfolios falling, some investors are looking to redeem value from asset classes they believe haven’t yet been hurt by re-pricing. The result has been the run on hybrid property funds and the freeze on redemptions from these funds over the past fortnight, according to van Eyk Research managing director Stephen van Eyk.

While listed property funds have now largely been re-priced, investors are yet to see the true value of many direct property investments, and there are concerns about a significant downwards repricing in the sector following listed property’s spectacular fall from grace.

But Property Investment Research associate director Dugald Higgins thinks many investors in hybrid funds are simply “hitting the panic button”.

“I think people tend to forget that property should be viewed as a long-term investment,” Higgins said.

He believes financial planners and investors should consider the need to exit a fund, rather than a desire to. Higgins argued that investors still receiving reasonable income from hybrid funds should be able to ride out the current volatility.

In regards to the re-pricing of direct property, van Eyk said it’s important to remember that gearing is a point of differentiation between listed and unlisted property funds, with the former more heavily geared than the latter.

“Listed funds were heavily geared, and that played a part in their downfall,” van Eyk said.

“You wouldn’t expect valuations [for unlisted properties] to fall nearly as far, although capitalisation rates may adjust upwards, which could reduce value,” he said.

According to Standard & Poor’s director of fund ratings Peter Ward, there are arguments for the strength of the underlying fundamentals of the Australian property market. Ward said while some investors may be fearful of a repeat of the property disasters of the early 90s, today is a “significantly different environment” in terms of more favourable vacancy rates, economic and interest rate conditions, and supply/demand ratios.

But the sector is not immune to the stresses facing most asset classes in the current environment.

Higgins said broader economic concerns, the potential for rising unemployment levels in particular, could “put a lid on profit growth and put further pressure on underlying values” in direct property investments.

While the latest Australian Bureau of Statistics figures show the unemployment rate remaining steady, these figures do lag, and Higgins said significant job losses in firms like Babcock & Brown and Starbucks could be a an indication of more job losses to come.