Guru Speak

In an inflationary environment, we desire returns on our savings and investments to be no less than the inflation rate to preserve the real value of our wealth. Property funds are investment alternatives that serve this need.

Property funds are mutual funds investing in freehold or leasehold commercial property. Typically, property included in funds should be able to generate a steady and predictable stream of returns over the life of the property.

Property ranges from office buildings, apartments, hotels, shopping malls, factories, and houses for rent. Through this financial arrangement, investors can jointly own a property or have the rights over the asset for a period of time, while the owner of the property recoups initial money back and, generally, turns to providing property management.

Cash inflow to the funds mostly derives from rentals, which can be for a long period over many years as in the case of factories, or as short as one day in the case of a hotel room.

The longer the rental term, the more stable the cash stream. The fund can collect rent from contracts in place for a period of time without looking for new tenants.

On the flip side, long contracts will unavoidably bar asset owners from raising prices to match inflation as well as operating costs. So, if we think inflation is rising, we may favour a shortcontract property, like a hotel, where room rates can be changed at will. It is a tradeoff between smooth income against inflationfloating cash flow.

Having said that, it by no means implies property opera¬tors will let go and do nothing to mitigate cash-stream volatility.

For example, there are certain property funds that guarantee minimum returns over a period of time to boost unitholder confidence. This undoubtedly reflects their commitment to manage the properties to get the promised return. To choose a property fund, apart from looking at the type and quality of the underlying assets, we also need to consider the capability and trustworthiness of property operators. Property operators are no different from management of corporations. They are not just rent collectors.

They are there to preserve and create value for the property. The property the fund invests in will appreciate or depreciate because of the opera¬tors' competence.

At this point, before you move on and invest in a property fund, you should assess your readiness to hold this asset class, as it is of a longterm nature with limited liquidity. Therefore, it is not recommended you put most of your wealth in property.

In addition, once invested, you need to hold on to it for at least three to four years to earn a sensible return.

By the third or fourth year, cumulative dividend yield should more than compensate for any liquidity discount embedded in bidding.

If you think you may need to unwind your investment sooner, it is better to refrain from property until you have excess liquidity.