Real EstateAug 15 2022

The pros and cons of hybrid property funds

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The pros and cons of hybrid property funds

Gaining exposure to real estate has been made significantly riskier for investors in the past few years but experts have said hybrid property funds could plug that gap.

Last September, Time Investments launched a hybrid property fund, with the aim of filling this gap for investors keen on property but less keen on being unable to access their cash. 

Marcus Phayre-Mudge, one of the managers of the Columbia Threadneedle Property Growth & Income fund, said hybrids are the solution to the problems facing investors who want both physical property exposure and liquidity.

The perfect combination is 65 per cent equities, and 35 per cent physical property, he said, though the equities need to be liquid, meaning that the fund doesn’t invest in a lot of small companies.

The fund also focuses on income-producing real estate investment trusts.

“With the physical property, the important thing is to keep your lot size appropriate,” Phayre-Mudge said. 

“In our fund, the largest building is about £15mn, and our smallest building is two or three.

“But the fund won’t grow beyond £1bn because we want to make sure that we're not forced, like some of the open ended funds were, to end up buying very big lumps of property.”

This gives the fund more flexibility in periods of redemptions.

Performance

Compared to the IA property other sector, in which hybrid properties sit, the IA direct property was the best performing, returning 8.76 per cent in the six months to June 30, however investors should beware of the risks in investing in this sector.

The sector comprises open-ended property funds, which have faced periods of investors’ cash being frozen as the funds gated against withdrawals.

The issues began after the Brexit vote in 2016, when the funds rushed to gate for redemptions amid concerns over valuations.

Then again in 2020 the pandemic left the fund managers with no choice but to suspend the funds again, after most independent valuers said the market conditions left it impossible to value the makeup of the portfolios.

Last May, Aviva Investors closed its UK property fund over concerns that it had become increasingly challenging to generate positive returns while also retaining enough liquidity to re-open the fund. This remained gated since the start of the pandemic.

The next month Aegon also closed its property fund, citing similar issues.

More recently, Janus Henderson sold its property fund’s entire portfolio after saying the “current strength” of the UK commercial property market as well as the "ongoing regulatory discussions" on the future for open-ended property funds were the reasons behind the move.

Fund/sector

Performance Nov 1 - June 30

Performance three years to June 30

IA UK Direct Property

8.76%

9.89%

TIME Investments Property Long Income & Growth

-1.79%

N/A

CT Property Growth & Income

-6.59%

10.13%

IA Property Other

-9.08%

4.7%

Time’s fund hasn’t been running for long enough to adequately measure its success, however there is one other that was launched in 2015.

The only other hybrid property fund in the UK is the CT Property Growth & Income Fund.

The fund has a 37.7 per cent exposure to UK direct property, 30.3 per cent in “continental” shares, and 26.5 per cent in UK property securities, with 5.5 per cent in cash.

Some of its Reit exposure includes 4.4 per cent in Primary Health Properties, a company that invests in healthcare real estate let on long-term lease, and 4.3 per cent in Vonovia, a German real estate company that provides housing-related services. It also includes Supermarket Income Reit with 4 per cent.

Over the three years to June 30 the fund has returned 10.13 per cent, above the sector’s 4.7 per cent. 

Pros

The obvious benefit to a hybrid fund is that, due to their increased liquidity, they should not be liable to the same withdrawal runs that have plagued open-ended property funds in the past few years.

Ben Yearsley, consultant at Fairview Investing, said one of the issues with holding an open-ended property fund, apart from the risk of gating, is the high level of cash held in anticipating of withdrawals.

“At least with a hybrid fund, you’re getting full property exposure,” he said.

“They give you the dampened volatility of owning physical property, but the liquidity of Reits.”

Over the short term investors will experience more volatility as a result, but in the long term the results should outperform cash, the value of which is being eroded quickly due to the current high levels of inflation.

Cons

The main issue is the lack of choice in the sector. The CT and Time funds are the only two hybrid property funds available to UK investors, and the Time fund doesn’t have more than a year of performance history. 

The CT fund also has no exposure outside the UK, so if investors are looking to diversify geographically, they will have to take a risk on the Time fund, which only has 11 months’ worth of returns.

sally.hickey@ft.com