Fundamental – Issue 1

Welcome to our first edition of Fundamental, a new publication from the HW Funds team. We are confident the combined strength of the McMahon Clarke and Hall & Wilcox funds teams will take our thought leadership and industry insights to another level and help you navigate the current challenges for investment funds.

We live in testing times, with many saying conditions are unprecedented.

We recently sponsored and attended the Core Property Research Annual Property Funds Industry Forum in the scenic (and deceptively calm) setting of Queenstown, New Zealand. The presenters reinforced the current themes and challenges for the funds management industry, and particularly property funds. Partner Elliott Stumm shared our latest insights on the managed investment scheme review and how it might impact the sector.

Market factors

The global economy is feeling the effects of a confluence of factors which many predict may result in higher inflation and interest rates for an extended period. After over a decade of relatively benign market conditions during which many asset classes including property have benefitted, the geopolitical instability, government infrastructure spending, the aftereffects of post COVID monetary policy, employment shortages, increased construction costs, high immigration, and even the shift to working from home, are now contributing to some uncertainty in the property market. Understandably, this has led to both fund managers and investors being more cautious, especially in the office sector. Anecdotally, we are hearing this has led to investors taking more time to make their investment decisions which means capital raising is more difficult than it was say 12 to 18 months ago.

A big issue

One of the big issues we are seeing, and was confirmed at the conference, is the difficulty in valuing assets in the current climate, especially for open-ended funds which provide some form of liquidity to their investors. This has implications for unit pricing on applications and redemptions. Fund managers need to consider whether it is appropriate to suspend applications until there is more clarity or whether boards should be making provision for expected changes in the value of fund assets in anticipation of sales evidence coming to light. This is likely to come to a head with formal valuations being required for the end of the calendar year. Valuation uncertainty has also reduced transaction activity as there is a mismatch between vendors’ and purchasers’ views on what assets are worth. This is also expected to change once the December valuation cycle is complete. As a result, we anticipate opportunities will present for those fund managers with ‘dry powder’ or those who can raise capital to take advantage of opportunities which may present themselves in the new year.

Fortunately, it is not all gloom and doom. There are still sectors where there is investor capital available and are transacting and performing well, including debt/credit, industrial, agriculture and agri-infrastructure, retail, health, build to rent, disability, and student accommodation. We congratulate Haben, one of our clients, on being awarded 2023 Unlisted Fund Manager of the Year at the conference for its Haben Townsville Trust which acquired the Townsville Shopping Centre.

We wish you well in navigating these challenges and opportunities, and of course the HW Funds team is here to help you.