Investors are facing a long wait to access the £13bn of cash currently trapped inside UK property funds, experts have predicted, as businesses remain “far from normal” and the commercial property market continues to be subdued.
Independent valuers said there were a number of things — many of which were “quite a long way off” — that needed to happen before the surveying body would agree to lift the material valuation uncertainty clause from all sectors, which in turn would see property funds reopen.
Nick Knight, head of UK valuation at CBRE, said: “In order to lift the clause, the main criteria is that we need to see a more normal level of activity, so more transactions in the marketplace. Once activity starts to return, the clause will be lifted from that sector.
“We’ve already lifted the valuation clause from some sectors, such as standalone supermarkets.
“But the main sectors these property funds invest in are office space, industrial and retail. There is some activity in industrial at the moment, but not much activity at all in offices and retail. The clause will probably remain in place longest for retail.”
The 11 UK property funds available to retail investors, with £12.8bn of assets between them, have been suspended since the third week of March.
Portfolios were gated because the coronavirus crisis had caused “material uncertainty” in the UK property market, meaning valuers were unable to value the assets within the funds with the same degree of certainty as would otherwise be the case.
Rupert Johnson, global head of valuation and advisory at Knight Frank, agreed that “not many businesses” were “anywhere near back to normal” yet.
What needs to happen
Mr Knight said one of the biggest things currently causing uncertainty, and holding back transactions, in the market was the fact the government had suspended forfeiture provisions within leases and had prevented the use of statutory demands to take rent.
Because commercial properties in the UK — held by property funds — are now unable to receive guaranteed income or yield from rent, potential buyers have held back from making transactions in the market.
Mr Knight said: “If your primary rationale is to receive that income, but this is no longer guaranteed, you’re likely to pause on your investment until we get back to a normal situation.”
Mr Johnson agreed, noting that rent collection and service charge figures, due to be published at the end of June, would be a good indicator of how many businesses were paying such charges.
He added: “[The figures] are quite likely to be down on those for March as businesses look to preserve cash — and that may not be good news for the valuation side.”
Both Mr Johnson and Mr Knight thought it was likely property funds would attempt to open in unison, even though the rules may allow some to open before others if different property sectors saw the clause lifted at different times.
Mr Johnson added: “It may not be the case of ‘first-move advantage’. If investors are short of cash there could be a rush to the exit door if a fund opens ahead of others.
“For that reason, it's important that the valuation profession looks to lift the uncertainty clause more widely as soon as conditions allow — in concert and in unison.”
Looking forward
Mr Johnson said he was “actually very optimistic” when looking at the market long-term, saying “there is a good market out there and where else are people going to get the returns you can from property?”.
But David Penny, managing director and adviser at Invest Southwest, disagreed. He said: “The prospect for commercial property in the near and even medium term is poor and our portfolios are very light on it now, if there is any at all.
“If and when property next looks a good bet, potential illiquidity is a feature which must be borne in mind rather than a reason to steer clear. For now, for most, avoid property funds.”
Alan Chan, director at IFS Wealth and Pensions, said the issue highlighted the mismatch in between the liquidity of the underlying property assets and the legal structure of open-ended property funds.
In December, the FCA it issued a joint report with the Bank of England which floated proposals to curb the "mismatch" between redemption terms and funds' liquidity.
The City watchdog was expected to provide an update on the development of new rules for open-ended funds later this year, but this has now been put on hold due to the coronavirus crisis.
imogen.tew@ft.com
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