n recent weeks there have been a stream of headline-grabbing announcements about workplaces and retailers. John Lewis has added eight stores to the list of outlets it will not reopen as coronavirus restrictions ease, the chocolate retailer Thorntons is closing all its 61 stores, and Santander is axing 111 branches and shutting several offices. Nationwide building society has told 13,000 staff that they can “work anywhere” when lockdown ends, while the publisher of the Daily Mirror has said most of its journalists will work from home. The pandemic is changing the face of the workplace, and our high streets. But what does this mean for the owners of those buildings – who might, even if you don’t realise it, include you? UK small investors have between them invested billions of pounds in property funds offered by fund management groups such as M&G, Legal & General and Aviva. Many more people are invested in property funds via their workplace pension scheme, which will often put some of their members’ money into commercial property as well as shares, bonds and so on. Typically these property funds are focused on office blocks and retail and industrial premises. That said, some may also place a certain amount in residential property or other property-related investments. With the funds aimed at small investors, one of the selling points is that while it might cost millions of pounds to buy a shopping centre or distribution warehouse, you can gain exposure to these huge developments for a regular investment of perhaps as little as £20-30 a month. For example, the Aviva Investors UK Property Fund’s biggest holdings include the Corn Exchange in Manchester city centre, the Guildhall shopping centre in Exeter and the Grade II-listed Longus House in the heart of Chester. Unsurprisingly, these funds have been hit hard by the Covid-19 pandemic. The average UK property fund has fallen by about 2% over the past year, with the Aviva fund down by about 12%. “Commercial property has certainly been in the eye of the storm,” says Ryan Hughes, the head of active portfolios at the investment firm AJ Bell. About £290m was withdrawn from property funds in 2020, according to the Investment Association, reflecting the challenges faced by the sector. The appeal of commercial property funds lies in yields of 5% or more from rental income, alongside the chance of future gains from capital growth. Property also typically behaves differently to shares and bonds as part of an investment portfolio and, in theory, helps to smooth out returns over the years. However, the sector has faced significant challenges during the UK’s lockdowns, with the need for premises falling and tenants requesting payment holidays or reduced rents. Justin Modray of the financial adviser Candid Financial Advice says: “The better-managed funds in the commercial property sector have generally been reducing retail exposure for some time, given the challenges faced even pre-Covid. As for office space, larger companies have mostly continued to pay rent as usual, so the impact of increased homeworking has yet to bite.” However, alongside the difficulties faced by the sector in general, these property funds also come with particular risks. It is harder to sell commercial property than a share or bond, so there is the issue of liquidity. You cannot sell an industrial estate or shopping centre overnight because investors want to cash in their units. Sales can take months to complete. Also, you may be unable to sell your holding for a period of time if a fund closes its doors to withdrawals. Most property funds suspended trading in 2020 as the pandemic took hold. Three funds – run by Aviva Investors, Aegon and M&G – are yet to open, leaving investors unable to sell their investments. Moira O’Neill, the head of personal finance at Interactive Investor, says: “Time and again, property funds have failed the stress test – whether that’s the UK referendum four years ago or the brutal reality of Brexit headwinds and a high street in terminal decline.” The City regulator, the Financial Conduct Authority, is consulting on rules that would force investors to give up to six months’ notice before redeeming their funds. This is aimed at preventing a run on cash reserves for struggling property funds and giving managers sufficient time to sell property to return money to investors. “It’ll be interesting to see how the new FCA rules play out,” says Evangelos Assimakos, investment director at investment firm Rathbones. “We haven’t been allocating investments to UK commercial property since Brexit because of concerns that there would be a re-run on withdrawal restrictions.” So what should investors in these funds do? “Some of the big losses from these funds will take some time to claw back,” says Hughes from AJ Bell. He stresses that investors must be comfortable with liquidity and access issues. But whether property funds should be ditched also depends on when the money is needed. “If you have exposure in your pension but won’t be retiring for 20 years, then current performance isn’t necessarily a problem. But if you hold a property fund in your Isa and you’ll need to access the money to pay for a house extension in the near future, then it becomes a lot less appropriate,” he says. People’s exposure to commercial property via their workplace pension scheme will vary greatly. Some funds may allocate a reasonable chunk of people’s cash to property, while others may have little or no money in it. Most big company pension schemes allow you to log in to your account online so you can check. For example, the giant Nest workplace pension scheme offers an ethical fund option with just over 8% of the cash invested in UK property. This is done via a Legal & General fund (LGIM Managed Property Fund) whose top 10 holdings include an office development in Wardour Street in Soho, London, the eye-catching 245 Hammersmith development in west London, and several buildings at Cambridge Science Park. There are other ways to gain exposure to commercial property. Alongside the bricks-and-mortar funds, there are property shares funds, which invest in the shares of property companies. These behave similarly to the stock market but do not face the liquidity issues of buying physical buildings. Modray says: “It does mean returns tend to be more correlated with stock markets shorter-term but I think that is a compromise worth paying.” He recommends iShares Global Property Securities Equity Index Fund, a low-cost fund with exposure to hundreds of companies around the world for a low annual fee of 0.17%. Putting money into a variety of bricks and mortar It is not only offices and shops. You can invest in anything from housing for the homeless to Amazon warehouses. “Investors can cherrypick the type of property exposure they want with investment trusts, which are targeting new, less traditional areas rather than office blocks or retailers,” says AJ Bell’s Hughes. With investment trusts, you buy a share in an investment company that buys property instead of the property portfolio. So they don’t have the liquidity issues associated with some of the property funds highlighted previously. Typically, investment companies that are focused on UK property are structured as “real estate investment trusts”, or REITs. These companies invest in commercial or residential property to produce a tax-efficient income, with 90% of profits paid out to shareholders. “You can get exposure to ‘big-box’ logistics warehouses, care homes, supermarkets, student accommodation, GPs’ surgeries, social housing and much else besides,” says Annabel Brodie-Smith of the Association of Investment Companies, which represents investment trusts and other funds. For example, the Supermarket Income REIT – whose portfolio includes a long list of properties leased to companies such as Waitrose, Tesco and Sainsbury’s – has raised almost £500m since the start of January 2020 and returned about 4% to investors. The Urban Logistics REIT and the Warehouse REIT have also benefited from pandemic-linked online buying trends. The latter’s tenants include Amazon and John Lewis. However, Brodie-Smith says there are a growing number of options. For example, the Home REIT was launched in October 2020 and aims to produce a decent return by investing in properties across the UK that will be used to provide “good-quality” accommodation for the homeless. Brodie-Smith says: “They invest in accommodation for people who have left prison or women who have faced domestic abuse.” You invest by buying shares in the REIT. Some investment companies take a broad approach by looking for opportunities outside the UK. For example, Interactive Investor lists TR Property Investment Trust on its “Super 60” recommended fund lists. This invests in office blocks and commercial properties across Europe.