So Far, New Star

Friday, August 10th, 2007

Posted by Overseas Property Mall in Funds, UK Property

It’s now almost three months since we last wrote about the New Star International Property Fund. During time it has exceeded its original (launch phase) target of £200m, reporting that £206m was actually subscribed. However, the same period has seen turbulence for investors in the new fund’s big sister, New Star’s Property Unit Trust, with lower returns sparking a rush to get out.

What’s certainly not open to question is New Star’s thoroughness in stating case through advertising in good times and bad. The group launched a new campaign in the personal finance press specifically to deal with the bad publicity arising from the switch to ‘bid basis’ pricing when the volume of ‘sell’ instructions threatened to undermine the model that a property fund like New Star’s works on.

The case New Star made, and that editorial pages made for it, was that the switch to ‘bid basis’ pricing reflected the real transaction costs of large numbers of sellers in a short period and protected the interests of those who remained in the fund. New Star claimed that ‘many’ of the larger UK property funds had switched their pricing basis and we’ve found reports of this being done by Norwich Union and M&G although Standard Life refrained from doing so while Scottish Widows reversed their decision to change the pricing basis after just two days. The practice of switching the pricing basis for property funds really is well established; maybe the Financial Services Authority should insist on this being explained in bold type in any promotional material for these funds.

The cynical might suggest that New Star uses advertising to protect its investors interest effectively because the consensus opinion in the financial press was that the panic had clearly been overdone. Sage commentators such as Heather Connon in the Observer (22^nd July) took the view that the problems of UK property funds were only relative and that, though in the medium term returns of 20% a year might not be achievable, respectable returns, beating savings accounts, certainly were.

The New Star International Property Fund was also given the benefit of some more of the group’s advertising budget last month and the selling that hit the UK fund was offset by the inflows into the international fund, according to Timesonline. However, for reasons that should now be obvious, New Star doesn’t appear to allow investors to switch, at no cost, between its property funds in the same as asset managers will allow investors to switch between different equity funds. The new fund is a minnow alongside the UK fund’s £2.2bn in assets. So far it seems about 50% of the fund has been invested in real estate with the biggest commitment being to the new Parakou Building in Singapore’s Shenton Way (approximately £40m) and smaller investments in Japan (approximately £28.5m) and Sydney (£32.5m). Interestingly, the Parakou deal is reported to have been for a significantly higher price per square foot than any other recent deals. This could be seen as a sign of the resurgence of the Singapore commercial real estate market or, possibly, the vendor, Parakou Shipping have committed to good terms for their lease on part of the building. The fund is also proposing to invest in a number of (smaller) continental properties.

The New Star property team was strengthened with additional international expertise in the persons of Robin Carr and Simon Tyrell. They have both been recruited from CB Richard Ellis and New Star is also advertising its relationship with CBRE and DTZ. Apparently, Jones La Salle advised on the Parakou deal.

It’s too soon to make a judgment on the performance of the fund, which has drifted down by a mere 2% since launch but it certainly looks as if the team are going to move on to any thin speculative ice. In general terms, ungeared funds look attractive at a time like this when financial commentators are talking about a credit crunch. The fund aims to pay an income in the region of 4% (definitely not guaranteed but arranged to benefit from ISA tax rules).