Don't throw the property baby out with the liquidity bath water
Ever since the Brexit vote in 2016, UK open-end property funds have been battling with challenges ranging from performance to liquidity.
The continued turbulence of Brexit and Covid-19 has led many funds to suspend redemptions, impacting the ability of retail investors and their advisors to rebalance portfolios and place deals. In some cases, performance has also been impacted by underlying sector exposures that have proved particularly vulnerable to the pandemic, such as high street retail. This has led to an ‘unvirtuous circle’ where many of these funds have become forced sellers of their best assets in order to build enough cash to reopen and service redemptions again. Due to concerns around this ‘liquidity mismatch’ and potential for harm to investors, the FCA consulted during 2020 on introducing a redemption notice period of between 90 and 180 days UK bricks and mortar funds. The FCA is now expected to publish a policy statement during Q3 2021 which could implement changes to redemption periods, dramatically limiting the ability for advisors to regularly rebalance clients who are invested in such funds. Some asset managers have decided to shut down funds entirely in the face of these challenges, such as the £366m Aviva Investors UK Property Fund which will wind up in July 2021.
Alternatives to traditional bricks and mortar funds are available in both closed-end and open-end formats in the UK. Closed-end vehicles (generally Real Estate Investment Trusts “REITs”) are a well-established and tax-efficient route for accessing property exposure in the listed markets. Global REIT market capitalisation is over £1.5tn, with a huge range of geographies and attractive sectors available such as logistics and healthcare. There are also open-end real estate securities/property shares funds available in the UK which provide a ‘fund of REITs’ model. This model can provide better platform access, diversification and reduced risk characteristics over single REIT allocations. These funds have been excluded from the remit of the FCA consultation due to the inherent high liquidity of listed REITs as an asset class.
With viable alternatives to bricks and mortar funds available for property exposure, there is an imperative for investors to consider whether issues with bricks and mortar funds warrant leaving the sector altogether. Whilst underlying REIT exposure can introduce some equity-like risk factors the income generation, inflation protection and exposure to global growth themes can also provide differentiated sources of return within portfolios. Many of the underlying sectors available in the global REIT market offer real estate investment opportunities that are likely to outperform retail and commercial over the coming decade.
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Capital at risk. Past performance is not a reliable indicator of future results.