British real estate funds should benefit from the reopening of offices, shops and restaurants. And the majority of those funds now allow investors to buy and sell units, having closed last year when the pandemic hit. But the outlook for the sector is still very uncertain after recent proposals from the regulator to replace funds that hold illiquid assets.
UK real estate funds – 2021 and 2020 returns
What’s the latest?
It is a step forward, a step backwards for the real estate sector. M&G Property Portfolio, the second largest open-ended fund in the industry, reopened in May 2021, having been closed as early as December 2019, as it was hit by “unusually high and sustained outflows”. At the time, investors were worried about Brexit and a Corbyn government.
But one of the smaller open-ended property funds, Aviva Investors UK Property, is due to be liquidated in July 2021. The group has said it fears heavy buyouts when it reopens – and said it was too small to benefit from the economies of scale enjoyed by larger funds in the sector. The company said, âSize is particularly important for funds that invest directly in real estate, as the costs of acquiring, managing and disposing of properties are generally much higher than the costs associated with other types. of assets. Investors are expected to get 40% of their money back this year, but may have to wait up to 24 months to get the rest.
Have all real estate funds reopened?
The majority of real estate funds have now reopened. Investors had been waiting for Aegon Property Income to reopen, but in June it announced its final closure. The fund’s liquidity levels were 25% at the end of April and the manager intended to reopen the fund âonce we are satisfied that the fund has sufficient liquidity to meet redemption requestsâ.
However, in an update on June 23, he said that it has “proved increasingly difficult to raise sufficient liquidity while ensuring that permanent investors have a representative and well-balanced portfolio. . Accordingly, in order to ensure that all investors are treated fairly, Aegon AM has decided to take steps to close the fund and return the proceeds to investors as quickly as possible in a fair and orderly manner. ”
What else should investors worry about?
Open-ended real estate funds have long been a concern of the Financial Conduct Authority, which has just launched a consultation on a long-term asset fund (LTAF) as an alternative way to hold illiquid assets like real estate.
The âcash mismatchâ remains the key problem: Investors can buy and sell shares on a daily basis, but the underlying assets are more difficult to move than shares of companies. The regulator is due to deliver its findings later in 2021. By then a cloud will hang over the industry, says Ryan Hughes, head of active portfolios at AJ Bell: âThere is hope that some clarity will come more. later in the year and investors will need this to have any confidence in the funds they hold and the structures in which they operate.
Have there been any exits?
Yes, inevitably, even as market conditions have become less volatile, it was not the ârush to exitâ that may have occurred in March of last year. These exits have been more of a trickle than a flood in recent months, according to Morningstar fund analyst Bhavik Parekh: âDirect real estate funds have seen exits since many of them reopened in recent months, but in April , these withdrawals were limited. The highest net outflow for a single strategy came from the M&G real estate portfolio, but this represented only 1.5% of the fund’s assets under management.
While the major asset class real estate has recorded Â£ 2bn in outflows this year, this also includes global real estate funds. UK Direct Property funds did not feature in the categories with the largest redemptions over the past year.
What was the performance this year?
The new lockdowns at the start of the year did not help the performance of real estate funds. But some have made a respectable demonstration. L&G Property has returned 4% (for context, the FTSE AllShare is up 8% over the same period) and most funds are in positive territory so far this year, a reversal from 2020, when most were underwater. The worst performer this year, with a loss of over 3%, is the closing fund, Aviva.
Is the worst over for UK property?
Commercial real estate investors are hoping that the reopening trend will be permanent after the false dawn of 2020, and that the new variants of Covid-19 will not trigger another nationwide lockdown. Global investors are now worried about inflation as economies reopen, and this trend is favorable for commercial real estate.
âHistorically, real estate has performed well during periods of inflation. As the economy grows and the demand for goods and services increases, rents tend to rise, making real estate investments a good hedge against inflation, âsays Calum Bruce, director of Ediston Property Investment. Company (EPIC). Many commercial leases are linked to inflation, which means that landlords will receive more income if the cost of living goes up.
Note: this article was updated on June 23, 2021 after the announcement of the closure of the Aegon Property Income fund