Teresa Hunter: Property addicts are facing a painful spell of cold turkey

Published on Saturday 19 January 2008 16:28

PROPERTY has become our financial drug of choice. My dictionary defines drug or narcotic as a substance which "causes euphoria in the taker and predisposes him to addiction". That captures it nicely, don't you think?

There is nothing wrong with sensible property investment. Many of us have done rather well out of it.

Problems begin, as with all drugs, when we OD. George Bernard Shaw said property is to the middle classes what gambling is to the poor. Either can lead to addiction.

On that basis, I predict some people are in for a distinctly unpleasant spell of cold turkey. One sign that any house price downturn will get uglier than we hoped is when property funds start to get into trouble.

Not that Aegon's fund is in trouble, I hasten to add, but clearly along with Norwich Union and Scottish Widows it is seeing big redemptions.

For me, one of the biggest ironies about property funds is they are always held up as safe havens, when in reality they can be an extremely high-risk investment. When the market turns, it is impossible to get your money out.

As ever, we must keep things in proportion. A small holding of commercial property is perfectly sensible in any portfolio, and these funds have performed very pleasingly over the past 10 years.

However, some of us could never take seriously claims that property funds are low-risk after living through the spectacular implosion of two giants during the last recession.

Target and Henderson launched residential property unit trusts for "ordinary punters" in the late 1980s at the height of the last housing boom, sucking in oceans of cash.

I can't tell you how much, because it seems all data concerning these funds has been airbrushed from history.

It's a good thing women have better memories than men, because I remember quite distinctly they came to a sticky end. Henderson was the one I followed most closely. As property prices fell, investors tried to withdraw their money, but couldn't.

Henderson tried to sell the houses in its portfolio to repay investors, but no one would buy. Investors were told they had to wait a year to get their money back. By then I had lost interest, because there were bigger fish to fry, not least the 1,500 families losing their homes each week.

I'm not sure how many ever got their money back, although I recall the fund effectively went bust. Henderson is unable to confirm or deny this to me, although a spokesman admitted it was wound up in difficult circumstances.

However, he did add that although Henderson now runs big portfolios of commercial property investments for other institutions, its past experience is why it no longer sells property funds to ordinary savers. I bet.

Sadly, this time round punters have swallowed the hype again and poured money into property funds as fast as the Government did into Northern Rock. They are both about to learn hard lessons.

The difference between property and equity funds is that you can almost always sell a share. But it is not that easy to sell a massive office block or shopping centre. In other words, when the market turns you can't get out and are trapped. This need not necessarily worry long-term investors, unless you fear the downturn will be severe and prolonged.

However, if these early liquidity problems at the funds are a sign of serious headaches to come, we could all be in big trouble. The huge unknown is how buy-to-let landlords will behave as prices tumble.

During previous recessions, second-property owners dumped at the first sign of trouble. There are some fundamentals underpinning the buy-to-let market, not least the huge explosion in student numbers. These youngsters will maintain yields for seasoned landlords.

Unfortunately, there remains a significant rump of speculative landlords with portfolios running into millions of pounds. Many are lucky to have equity of 20%. If prices fall by 20% they are wiped out.

If they ditch, we are all lost.

Money for nothing

CREDIT insurance is back in the news with HFC Bank being hit by the biggest ever fine of 1m.

Many consumers have been sold insurance they do not know they are paying for and which is worthless to them because they would never be able to claim.

If you have a personal loan or other credit, check you are not throwing money down this particular drain.

Give us nicer Isas

AS MARKETS continue to rollercoaster, I predict an interesting Isa season.

Many readers will want to make the most of their tax break, but the end of March will be too early to go back into the stock market. Let's hope institutions come up with some innovative thinking to help.