John Greenwood, chief executive of Isle of Man-headquartered discretionary fund management group, Creechurch Capital, said investors had come to expect returns well beyond those normally achieved by property funds.
“We were invested in the Mansion fund until June last year when we exited,” said Greenwood. “Arguably we were a bit early, we maybe could have hung on a bit longer, but we could see that returns were going to begin to drop off.”
According to the fund’s published annual performance, returns fell from an eye-watering 30.1% in 2010 to 14.2% in 2011 then to 9.75% last year. Meanwhile the year to date return to the end of August was 4.9%.
Greenwood suggested these falls were partly caused by the growing size of the fund and the shrinking relative impact each new development, property development being a core focus of the fund’s strategy, has on its returns, adding that “elephants don’t run”.
“No one was preparing for a reduction in returns,” added Greenwood. “There is absolutely nothing wrong with 4.5% but I think people were guilty of overegging returns, hence the large redemptions.”
With the £1bn Brandeaux Student Accommodation Fund also currently suspended, the obvious question is whether the sector is still a good allocation for investors?
According to John Cartwright, chief executive of the Association of Real Estate Funds, it would be “wrong to condemn the whole asset class”.
“There are plenty of sensible managers in the property sector, delivering decent returns for investors,” Cartwright explained. “The key is to ensure funds are transparent and have good governance. If people are expecting returns as high as 20%, something is wrong.”
This view is echoed by Greenwood who said increasing institutional and family office interest in the sector demonstrates its potential and will ensure it continues to thrive.
Meanwhile John Kennedy, chief executive of Coral Portfolio, manager of a rival student accommodation fund, said yesterday’s suspension “came as no surprise”, explaining that it “has been a difficult year for alternative funds that are traded on open platforms”.
“The current model is flawed since the assets are generally less liquid than the fund platform which offers them,” said Kennedy.
“Also, fundamental conflicts of interest within these structures can create significant disincentives for managers to sell assets to meet redemption requests.”