Brexit and the Financial Conduct Authority's planned tightening of the rules around funds holding illiquid assets may have a double-whammy effect on property investments in the UK, a specialist asset manager has warned.
Marc Haynes, head of Europe, Middle East and Asia sales and client service at Cohen & Steers, said both the regulatory stance on illiquid assets such as property, as well as uncertainty over Brexit, would likely spur investors towards funds investing in listed property securities, as well as diversifying away from UK real estate.
He said: "The latest FCA proposals offer implicit recognition that shoehorning illiquid bricks and mortar property into a liquid vehicle structure has fundamental drawbacks.
"Its proposal that funds should suspend dealing when there is ‘material uncertainty’ about the valuation of at least 20 per cent of total assets should prevent a run during times of market stress, but it will also likely lead to more frequent and widespread lock-ups.
"For investors wanting the assurance of daily liquidity, funds investing in listed property securities may offer a better solution. Moreover, these portfolios are typically much better diversified, offering geographic exposure to property markets beyond the UK."
Mr Haynes was referring to the FCA's 79-page consultation on illiquid assets and open-ended funds, which is open until 25 January 2019.
Brexit uncertainty also posed a problem, Mr Haynes added: "Given the continued uncertainty around the outcome of Brexit, UK investors must question whether it is time to seriously consider diversifying real estate investments away from a purely domestic-focused strategy to a more pan-European, or even global strategy.
"With UK property funds exposed to Brexit risks, investors have a strong reason for casting a wider net into other property markets via liquid real estate securities funds.”
As far as Brexit is concerned, real estate is correlated to the economy, so an outcome that sees lower GDP will have an adverse effect on returnsAlan BrierleyBut Jason Baggaley, manager of the £481m Standard Life Investments Property Income Trust, said fears over regulation and the possibility of a no-deal Brexit might be overblown when it comes to property investments.
He said: "The FCA has of course only issued some draft ideas and asked for comments. It is early days and the paper contains a lot of information.
"I don’t think the proposal will have a major impact on the listed sector, although some investors might choose to reconsider the balance of liquidity of a daily traded closed ended vehicle such as a real estate investment trust versus the greater short term volatility of the equity share price. I think that is missing the point.
"For most investors real estate is a medium to long-term investment, so liquidity and spot price should not be the key driver in the choice of vehicle. Instead, I would suggest they need to consider what best meets their investment aims, for example the level of dividend, and whether the fund is holding elevate cash levels, or geared into the market."
But he said he advocated closed-ended structures for investing in property. He explained: "I remain a fan of the closed-ended structure for the main reason that every investment decision is driven by what I believe is in shareholder’s best interest."
This would help shore up the investment trust in the event of an economic downturn - a scenario presented as a result of a no-deal or poor-deal Brexit.
Mr Baggaley said: "I don’t need to either hoard cash or sell assets in a poor market to meet redemptions, or invest in an expensive market because of inflows. It also means I can hold my best assets (the most liquid) through difficult times, in order to gain the greatest benefit when the market picks up."
He pointed to recent research from analysts Canaccord, which highlighted the difference between closed-ended investment trusts and open-ended property funds.
It said: "Over 10 years, the average annualised net asset value and shareholder total returns are 7 per cent and 10.9 per cent respectively , versus 4.3 per cent for UK commercial property open-ended funds."
When it came to Brexit, Canaccord had a mixed view on the possible outlook. Analyst Alan Brierley of Canaccord added: "As far as Brexit is concerned, real estate is correlated to the economy, so an outcome that sees lower GDP will have an adverse effect on returns.
"At a more granular level, a poor Brexit with a slump in sterling could have an adverse impact on the retail sector but with greater capital inflows supporting office and logistics pricing from overseas buyers.
"The industrial sector could benefit from a poorer Brexit as firms need to store greater inventories to combat boarder delays. Although Brexit will have an impact on capital returns over the short to medium term, well-let, good quality properties will continue to provide an attractive income return."
simoney.kyriakou@ft.com
