For financial professionals only
Buying or selling a private property can be a long, drawn-out experience. For commercial property owned in funds, the process is really no different. The time scale is unpredictable, and not easily expedited.
This doesn’t lend itself easily to a daily-dealing, open-ended investment vehicle, where investors expect to make a sale instruction and see the proceeds within 3 or 4 days. Commercial property fund managers have adjusted for this with a healthy cash buffer, but in times of heavy outflows, that is not enough.
This is the risk that underpins the current FCA consultation, with proposals including up to 180 days’ notice for redemptions.
Other vehicles have sprung up to answer the challenge – such as Real Estate Investment Trust (REIT) and Exchange Traded Fund (ETF) structures that enable investors to access property.
For Parmenion with our risk first approach, the benefits gained from diversification outweigh the move from direct exposure. You can see this in the chart below – REITs were more in line with equities in the first part of this year, while traditional property was defensive.
The best things in life are (tax) free
In February 2020, HMRC introduced changes to the taxation of UK property-rich collective funds within offshore bond wrappers. Designed as anti-avoidance legislation, gains will be taxed on the sale of any funds investing at least 75% of their assets in UK property.
It’s down to individual offshore bond providers to assess how they respond to this change, but it will have a knock-on impact on the attractiveness of the asset class as part of a multi-asset portfolio within these wrappers. This is a blow to sentiment around traditional property exposure. What we don’t know, with funds currently suspended, is whether it will trigger meaningful outflows.
Access denied
Compounding these external pressures, the commercial property funds held in our solutions remain suspended. Importantly though, the current suspensions are not driven by liquidity concerns or by outflows, but by new regulation (ironically designed to protect investors against material valuation uncertainty).
Thanks to our proprietary technology this hasn’t affected our usual rebalancing activity, although naturally investors are concerned – even those with a long investment time horizon who can withstand a shorter-term restriction to access that part of their portfolio.
Watch this space
Marrying up illiquid property in a liquid structure is challenging. But when we build portfolios, we’re looking for diversification to support consistent returns through different market conditions over the long term. We continue to monitor volatility, max drawdown and correlation trends through our 20-year risk framework. For now, we remain a believer in the benefits of bricks and mortar.
Warren Buffet famously said investors should “only buy something [they’d] be perfectly happy to hold if the market shut down for 10 years”. Perhaps he should have added “subject to tax and legislative implications.”
We are solutions driven, and that is the reality of our decision making. We already support investors who want to exclude property through our unique multi-option capability, and we know that we may need more formal structures to facilitate the advice process in the ever-changing investment landscape.
In the meantime, we continue our regular, open dialogue with our property fund managers, discussing their engagement with their tenants and with the regulator’s consultation review. We look at the status of their suspended funds and transactional activity at least every 28 days. Even as transactions resume, uncertainty around valuations continues for between 30-60% of their portfolio, though they are expecting this to ease along with lockdown restrictions.
We will be engaging with the regulator to respond to their consultation on property funds, and will continue to monitor proposals. Your RSM will keep you updated as and when the situation changes. In the meantime, if you have any questions, please get in touch.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.