Investment analysts have predicted the notice period proposed by the Financial Conduct Authority, which could be up to 180 days, will see advisers and discretionary fund managers switch their clients’ property exposure to Reits, which they say are more aligned with property’s illiquid nature.
David Baker, chief investment officer of financial planning at Mazars, said: “Practically speaking, retail investors’ exposure will inevitably pivot towards Reits.
“Despite a correlation with the rest of the equity market and a higher volatility profile than open-ended funds, Reits do ensure liquidity – a precious commodity at times of high volatility and directionless markets.”
Marc Haynes, senior vice-president and head of institutional sales and client service for EMEA at Cohen and Steers, agreed, adding the FCA’s rules had “undoubtedly paved the way” for the Reit funds market in the UK.
According to Alex Harvey, portfolio manager at Momentum Global Investment Management, property’s role in a balanced portfolio would not be “too different” from its role before the pandemic and the proposed rule changes, but agreed how investors accessed the asset class could change.
He said: “The liquidity problems that have beset daily dealing ‘bricks and mortar’ property funds may see more capital allocated to property via closed-ended structures, or through property securities – listed property companies and Reits.”
The problem
All bricks and mortar open-ended property funds available to retail investors were suspended in the first quarter of 2020. The swathe of closures arose because valuers deemed it impossible to value the property owned by the funds with the same degree of certainty as would otherwise be the case.
It mirrored what happened in the aftermath of the EU referendum in June 2016, when funds were forced to gate following a rush of withdrawals.
In a consultation published last month (August 3), the regulator said there was a “liquidity mismatch” between the underlying property held in such funds and the daily basis on which investors bought and sold units.
To move some way towards rectifying this, the regulator has proposed rules that would require investors to give notice – potentially of up to 180 days – before their investment is redeemed.
Commentators have forecast the rule change could “spell the end” for retail investors in open-ended property portfolios while some investment analysts warned the proposed rules were adding to a perfect storm that put property funds at risk of liquidation.
‘Simple’ solution
Adviser Philip Milton, of Philip J Milton & Company, argued there was a “very simple solution”, noting he was “bemused” that fund managers had not considered it.
He said: “Each fund management company needs to create a Reit and transfer all the properties owned into it, in exchange for shares being allocated to the unitised fund, pound for pound.
“It would facilitate the ownership of property, easy access to investors at a price and protect the funds. [Managers] could make long-term decisions needed for property, and ensure they do not have to keep significant cash reserves in case of redemptions, so more money can be put to work.”
Ricky Chan, director at IFS Wealth & Pensions, agreed. He said it would “certainly be more beneficial to investors and fund managers alike” than the 180-day wait.
Potential problems
Other experts were quick to remind investors that Reits were not without their own problems and issues.
Ben Seager-Scott, multi-asset manager at Tilney, said Reits appeared like an “attractive option” but argued the same challenges persisted in a “different form”.
He said: “You still need to find a willing buyer if you’re trying to sell. In the midst of a crisis when open-ended funds are gated, in theory you could still sell your Reits, but at something like a 20 per cent discount.
“That’s a pretty steep penalty to be paying, and many investors would likely feel ‘stuck’ with the position until it recovered anyway.”
Property is typically used as a diversifying asset against stock market volatility, often behaving to contradictory or unrelated trends.
But Adrian Lowcock, head of personal investing at Willis Owen, flagged that as Reits were listed on the stock exchange, they were likely to share characteristics of equities so could be “just as volatile” and offer “little diversification benefits”.
Ben Yearsley, investment consultant at Fairview Investing, was less worried about the stock market.
He said: “I have changed my mind over the past 18 months. In the past, I considered [Reits] as ‘not real property’ as investors were often getting stock market volatility over the short-term, but frankly, so what?
“You are still getting returns driven by the underlying property over the long term.”
imogen.tew@ft.com
On September 29, FTAdviser will be a running a CPD webinar discussing property's future role in advisers' portfolios. Click here register and to find out more.
