Avoiding The Pitfalls

1966: This Property is Condemned

What makes a good financial adviser? Given the way that most investors behave, I would assume that most must believe that a good adviser is one that makes them a fortune without any risk. If only this were possible. The truth is rather more uncomfortable. In my opinion, a good financial adviser is one that helps investors make fewer mistakes. I have spoken and written about this regularly.

Yesterday, an offshore British Real Estate Fund (BREF) run by Tilney Asset Management (owned by Deutsche Bank) went into administration. Accountancy firm PriceWaterhouseCoopers (PWC) are fairly grim about the chances of investors getting back any of their money. This is a fund with spectacular under performance in recent years. The fund, which invests in commercial property resides in Guernsey (a tax haven) and was able to use borrowing to ideally improve returns, but as we all know, debt can be a millstone and can lead to ruin, which is precisely what happened here when combined with sharp declines in commercial property valuations. Many businesses rely on finance (borrowing) to be renewed or renegotiated. This is not the world that the Banks now live in. In the summer, the fund had 24 properties worth £58.65m and debt of £77.61m a loan-to-value of over 130%. The  BREF could not agree a way forward with its existing lenders (Santander and Aareal Bank) and so called in PWC.

Most Fund Managers and advisers will have an element of property within their portfolios. I am reluctant to say "never" but in general I don't like assets that are not very liquid. Selling a property fund is sometimes very difficult - you might recall AVIVA suspended their European property fund in November 2008 for 13 several months. The point being that it is not easy to sell all or part of a retail/business park. The BRE Fund has only 24 properties (see page 10 for a list). Property can have a place in a portfolio, but it is not as safe as some would wish to believe. Indeed it can be a very high risk form of investment when debt is also involved. This is one mistake that our clients have not made of late, but one that many big-name firms have.

DT