Understanding economic, market and super cycles
Last weekend, we visited Brighton Pier. My husband and I enjoyed the view and the sound of the...
As open-ended property funds are given the green light to reopen, we take a look at what caused the suspension of trading and discuss whether the property sector is still worth investing in.
While property fund suspensions are not new, previous closures have been due to the fact that lots of investors wanted to redeem their assets at once. When this happened, the managers of the property funds couldn’t sell their properties quickly enough to generate the cash needed to return to investors and had to suspend trading.
We all know that buying and selling houses takes time – commercial buildings even more so. And the trouble is that with open-ended funds, investors are technically allowed to buy and sell units daily, but the underlying properties take far longer to exchange. This is called a ‘liquidity miss-match’.
Usually, open-ended funds hold a reasonable amount of cash to cover redemptions, but at times of great uncertainty, more cash may be needed and that’s when the problems start.
This time round, the suspensions were due to the fact that the Coronavirus made it impossible to value the underlying properties. Not only was there great uncertainty due to the global pandemic, valuers were also unable to get out and value properties in lockdown. With uncertainty over the price of the fund’s units that investors buy and sell, the funds were forced to suspend.
Now lockdown has been eased, this ‘material uncertainty clause’ has been lifted, but transactions in the property market continue to be impacted by the COVID-19 pandemic and the ongoing uncertainty over Brexit.
The Financial Conduct Authority has opened a consultation looking at the possibility of introducing notice periods of 90 or 180 days for investor withdrawals to reduce the liquidity mismatch of the funds and underlying properties.
This has been broadly welcomed – it’s an opportunity to find the best solution for investors given the challenges faced by open-ended property funds in recent years. It would also mean less cash would need to be held, so investors would be more fully-invested.
But there are still some practical challenges: fund platforms would need to be able to accommodate the different dealing limitations and tax-wrapper treatment needs to be preserved. The consultation closes on 3 November 2020.
Closed-ended funds – property investment trusts and REITs – do not have this liquidity problem, as there are a limited number of shares that are traded. But there is also a trade-off, as the price of those shares can go to a discount to net asset value. Anyone redeeming their investment at a time when sentiment is low, could get less for their shares than the underlying properties suggest they are worth. Also, some platforms don’t yet hold trusts or REITs, so they are not as widely available.
Like all asset classes, the property sector has been feeling the pinch from a recession-hit market. The winners and losers of structural changes already taking place – like the shift to online shopping – have been accelerated, while new working from home practices are leading to a rethink on office space.
Marcus Phayre-Mudge, manager of TR Property Trust, and BMO European Real Estate Securities, discussed the future of office spaces and the death of hot-desking in this podcast interview in June.
Ainslie McLennan, co-manager of Janus Henderson UK Property fund, told us: “COVID-19 has, in many, ways accelerated the market shifts that we have been anticipating. Industrial and logistics are sectors we have liked for several years because they are beneficiaries from the rise in ecommerce, which the lockdown has only encouraged.
“We also expect retail warehousing to become more robust as the size of the units easily allows for social distancing. Supermarkets have been a beneficiary of the lockdown and those occupying properties owned by the fund continued to trade well.
“Social distancing measures and greater working from home is likely to continue to affect offices. Those offices that we do own are not high-rise and, therefore, should be easier to accommodate staff when they start to return.”
The asset class also remains a good diversifier within a wider portfolio and a source of income – rental payments currently are a mixed picture but generally positive. The property cycle moves at a different speed to equities and bonds and has a low correlation to both.
Matt Jarvis, a fund manager at Legal & General, tells us more in this video:
The residential housing market has held up well. Stuart Springham, manager of TM home investor fund, told us: “A combination of buyers’ pent-up demand following the UK-wide lockdown and the introduction of the Stamp Duty Holiday led to a Q3 performance few expected back in Q2 when the market came to a sudden standstill.
“Underneath the headline figures we are carefully monitoring regional trends. Some areas are seeing higher unemployment and furlough due to significant exposure to one sector (such as Sunderland or Slough), whilst others are due to recent regional lockdowns (Leicester or Blackpool, for instance). Our investment approach can, and does, avoid areas that rely too much on one sector, but we cannot do anything about regional Covid-19 lockdowns.
“What we can do is build a regionally diversified portfolio to avoid being overly exposed to a single town or region. Currently, the fund holds 204 mainstream houses and flats spread over 55 different locations.”