Financial crisis lessons on property are being ignored

Financial crisis lessons on property are being ignored

With a number of commercial property funds still temporarily closed to trading, one industry figure has criticised the investment industry for failing to learn the lessons of the 2008 financial crisis.

At the beginning of July, property funds were hit by a frenzied rush of redemption requests from investors panicking after the Brexit vote.

Commercial real estate funds managed by some of the UK’s largest fund houses were forced to suspend trading, which Marc Haynes, senior vice president of investment manager Cohen & Steers, said was not a surprise.

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Bearing in mind some open-ended property funds were forced to 'gate' during the financial crisis six years ago, Mr Haynes said a key lesson from the last crisis has been ignored.

“Presumably, managers thought things would be different this time,” he said, pointing to the increased liquidity requirements which some firms thought would buffer against a torrent of withdrawals.

“Sadly they did not. If anything was different, it was the growth of model portfolios – one of the unintended consequences of recent regulatory reform.” 

He claimed this actually concentrates decision-making, meaning asset allocators shift tens of millions of pounds at the push of a button, which he argued “exacerbates the problem”.

According to Mr Haynes, one way to stop history repeating itself again is to follow in the footsteps of the US and invest in the listed real estate market.

He said investors who tap into the listed market are more likely to get exposure to properties that are extremely difficult, if not impossible, to access directly.

“Real estate securities are a natural fit for open-ended vehicles as they provide underlying liquidity, and the funds that invest in listed securities have been successfully ‘stress-tested’ through the financial crisis and again through the Brexit volatility.”

Mr Haynes also claimed listed property securities, or real estate investment trusts (REITs), also offer strong returns compared to direct property investments and have better dividend yields. 

“This is due in large part to the minimum distribution requirement for companies structured as REITs. 

“The vehicles also have a history of consistently raising dividends, resulting from cash flow growth that can come organically from rising rents and occupancies, or externally from development and acquisitions.”

The Bank of England and the Financial Conduct Authority are currently reviewing the issue surrounding the liquidity mismatches of property funds.

Mr Haynes said the regulators need to address what he described as the “structural flaws” of open-ended direct property funds by implementing a ban on daily dealing.

“The asset management industry learned a great many lessons from the global financial crisis. However, it failed to adequately address the structural issues of open-ended direct property funds, which was clearly on show over the last few months. 

“We must now see reform and better educate investors about the benefits of the listed REIT market.”