Retail property has its attractions but there are some legal issues which need to be considered before advising clients to put money into the sector.
Firstly, there is working out how UK investors can get access to the real estate asset class.
There are four basic ways in which investors can gain exposure to the real estate asset class:
■ Direct investment
■ Private closed-ended funds
■ Real estate investment trusts (Reits), property investment companies (PICs) and similar listed vehicles
■ Open-ended funds, such as Property Authorised Investment Funds (PAIFs).
In general, only the latter two (Reits and PAIFs and their respective comparable vehicles) are available to retail investors.
In this article, we use “Reits” to refer to all closed-ended listed vehicles, regardless of whether they are strictly Reits and “PAIFs” to refer to all open-ended property funds, regardless of whether they are strictly PAIFs.
Suspension allows a period of value and price discovery and enables assets to be sold in a more orderly fashion and therefore, in theory, for a better priceFor a comparison of Reitss and PAIFs, see the box-out below, ‘Comparison of Reits and PAIFs’.
Liquidity
Reits and PAIFs offer their investors liquidity in very different ways. Reits are closed-ended and their investors buy and sell shares on the open market. Since Reits do not redeem shares, they are not required to retain liquid assets to fund investor sales.
In addition, the share price is set by normal market price discovery mechanisms. The share price is correlated to the underlying net asset value of the shares, though not perfectly and it is usual for shares in Reits to trade at a price below the net asset value per share (a discount) or in some cases at a price above the net asset value per share (a premium – for example healthcare assets have traded at a premium in recent months).
In contrast, PAIFs are open-ended vehicles. This means that they offer regular (often daily) dealing which involves issuing new shares to new investors and redeeming the shares of investors who wish to sell.
The fund manager sets the price, which effectively reflects the net asset value of the underlying assets. PAIFs have to retain sufficient liquid assets to enable them to meet their obligations, such as meeting unit/share redemptions on a dealing day.
The effect of unusually high sales
The different liquidity mechanisms produce different results at times of high sales. Immediately following the result of the Brexit referendum, Reit share prices fell significantly in the wake of investor sales.
