Real estate funds one year after confinement


As we approach the first anniversary of the initial Covid lockdown in the UK, many people are still working from home. The end of the foreclosure may finally be in sight, but remote working appears to be in the long run, with some companies choosing not to renew office leases.

It remains to be seen how many companies will do this and whether it will become commonplace.

The commercial real estate industry in general has taken a hit over the past few years with various market events. The Brexit vote in 2016 had immediate fallout, and in March 2020 many funds were put on hold when the lockdown measures were first announced.

Some real estate funds have since reopened, such as offers from BMO, Canada Life Asset Management, Columbia Threadneedle, Legal and General and Royal London. Janus Henderson’s UK real estate fund has reopened in recent weeks, but M & G’s real estate portfolio has been closed since December 2019.

The disruption in the real estate space is hardly surprising given what has happened to the markets. Real estate funds have spent most of the past 12 months in negative territory for both performance and sales.

The Investment Association has two dedicated real estate fund sectors: UK Direct Property, which invests in bricks and mortar, and Property Other, which invests elsewhere in real estate companies or overseas properties. . UK Direct Property funds are more difficult to evaluate in terms of performance due to valuation issues.

While UK Direct Property sector funds are valued on a daily basis, the properties themselves cannot be valued. The sector may appear less volatile, with fewer ups and downs; However, if a market collapses or explodes after properties have been valued, the industry can experience rapid changes. For example, if there was a real estate bubble and valuations fell massively, the UK Direct Property space could start to see regular declines in yields.

The UK Direct Property and Property Other sectors both recorded negative flows throughout the year, with the highest level in October at £ 163million, shortly after some funds reopened.

Real estate funds traditionally invest in commercial real estate rather than residential real estate, and space is more generally divided into retail, industrial and office.

Investment trusts are another option for investors, with real estate investment trusts also available, but these have also experienced a decline in performance over the past year.

In 2020, the FCA launched a consultation on ‘liquidity mismatch’ in open-ended funds, with many welcoming proposals to address potential liquidity damage in some open-ended funds. The regulator suggested that investors notify fund managers in advance if they wish to redeem their investment, offering a period of 90 to 180 days. The aim is to allow funds to operate in a “fair and efficient” manner for the benefit of investors. At the time, the Association of Investment Firms said the proposals were “a step in the right direction.” Responses will be published “as soon as possible” in 2021.

Despite the challenges the commercial real estate market has faced, rents were still expected, so the space did not experience as many problems as some might think. Commercial real estate covers all kinds of non-residential spaces, such as offices, hotels, hotels, and retail, many of which have long been empty. Many properties have not offered rent concessions, so while empty, the property is still making money.

The graph shows the averages of the IA Property Other, IA UK Direct Property and AIC’s Property UK Commercial sectors over the past five years. While it is clear that the UK Direct Property space has evolved more fluidly over the years, as previously mentioned, sharp declines can be seen after the Brexit referendum of June 2016 and in the weeks that follow.

The spaces of mutual funds and investment trusts are similar in terms of where they invest, so their performance is roughly correlated.

Looking specifically at funds within the space, investment trusts recorded the highest returns – as well as the lowest – with investment trust counterparts firmly in the middle and the real estate industry elsewhere. showing the highest average returns.

Although there was a huge drop in performance around the same time last year, returns appear to be improving once again. Only time will tell how the space performs as people continue to work from home, stores close, or office leases aren’t renewed, and how the FCA consultation unfolds this year – but the sector can always be considered.


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