Hybrid real estate funds: another option

Considering the problems faced by the sector in recent years, it may seem strange that a new open real estate fund has entered the market. Yet this one promises to be different. Time: Real Estate Long Income and Growth Fund (GB00BMH82X78) will take a “one-size-fits-all” hybrid approach, holding both real estate titles and directly owned real estate assets.

The logic makes sense: with around a third of the assets in direct real estate, 7.5% in cash and the rest in real estate stocks, the fund will seek to offer better liquidity than open-ended funds that focus solely on directly holding property. real estate, with lower volatility than a portfolio of listed real estate securities. While investment trusts are usually the best option for accessing illiquid assets, it might appeal to investors who don’t want to think about the stock price dynamics of a closed-end fund.

That said, I’m not sure this offer is unique: another open fund, BMO Real Estate Growth and Income (GB00BQWJ8794), has applied a hybrid approach for many years. About two-thirds of that fund was in real estate stocks at the end of July, with 31.6 percent directly owned in the UK. Which begs the question: how did the hybrid approach come about?

If you compare the BMO fund with open-ended vehicles that directly own properties in the UK, the picture is mixed. The fund could not escape the material uncertainty that gripped the real estate sector at the start of the pandemic and had to suspend its activities alongside direct real estate funds in March 2020. But it was able to resume its activities. in June of the same year, making it the first fund to do so. From the wording of the Financial Conduct Authority (FCA), it also appears that the rules proposed by the regulator for open-ended real estate funds (including a waiting time for investor redemptions) should not be apply to this hybrid fund.

BMO Property Growth & Income had a historic return of 3% at the end of July, which roughly matches that of many direct open-ended real estate funds. Its total returns currently look quite impressive compared to funds in this sector, although BMO’s portfolio is likely to experience larger gains and losses when stocks are volatile. With markets rising for much of this year, it has outpaced most direct open-ended real estate funds so far in 2021. In 2018, a tough year for equities, the BMO fund fell behind. all the names of this sector.

The BMO fund has also fallen behind some of the open-ended funds that only buy listed real estate and real estate securities for the past five years, which should come as no surprise. It outperformed investment trusts who buy commercial property in the UK during the same period, although over the past year many shares of the trusts rose as they recovered from the slump of 2020. Also note that when it comes to income games, many investment trusts will offer higher dividend yields.

The hybrid approach appears to have offered interesting middle ground with fewer liquidity issues and reasonable returns. But a caveat if you think of real estate as a way to diversify stocks: BMO fund fell harder in the market’s massive sell-offs of spring 2020 and the last quarter of 2018 than any other direct real estate fund. with variable capital.


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