With all these options, capital is at risk and investors do not have control over the underlying assets held. Listed funds generally offer clear pricing and clients can typically liquidate their investment to cash.
However, there may be costs or fees involved, as well as timing considerations. If a large number of investors attempt to cash in at the same time, this could force some property funds to suspend trading – or move to bid pricing – as in 2016, following the UK’s vote to leave the EU.
Correlated versus uncorrelated
Traditional listed funds typically follow the broader market movements regardless of the underlying asset values. Financial innovation is delivering more options for investors looking for alternatives, such as:
• Unlisted funds, which are traditionally available for institutional investors only, but following Mifid, the adviser market has been more receptive to these funds and more individual investors have been able to participate.
As unlisted funds are not traded on an exchange, their price is not subject to daily price volatility, and they trade at a value closely linked to their net asset value.
Investments in unlisted funds are generally illiquid, and many have ‘lock-in’ periods.
The Financial Conduct Authority has just closed its consulting phase on the rules governing funds that invest in assets with little underlying liquidity, reflecting the increasing demand for these products.
• Crowd-funded real estate special purpose vehicles, which allow investors to select individual properties to invest in. While the selection allows more control, the pipeline of investments is not guaranteed or necessarily suitable for the investor’s objectives, so it takes time to create a portfolio.
Pricing is linked to NAV, but such SPVs are not readily saleable securities. Where liquidation is possible, the proceeds can be lower than market value, and trading fees can be significant.
We expect growth in this area from many buy-to-let investors exiting their directly held portfolios and moving into structured and intermediated products.
• Property-backed lending, which provides an opportunity to earn a passive income from property, with the potential for attractive risk-adjusted returns. Property loan investments range from buy-to-let through to wide-ranging property development, such as building hundreds of homes on a greenfield site.
When choosing which property loans to invest in, investors should ensure they understand the nature and scope of the underlying project – for instance, whether it needs planning permission.
What does the near-future hold?
We expect to see an increase in choices available to enable homeowners to use their house to generate income and release capital.