Uncertain future for UK property funds as LTAF rule change looms

Fund groups insist that daily-dealing property funds have a place in the market as the suspension of the Janus Henderson UK Property Paif and the Financial Conduct Authority’s liquidity review cast a shadow over the sector.

UK property funds have weathered the boom, with sudden market downturns due to the Brexit vote and the coronavirus pandemic triggering a series of suspensions, followed by a wave of redemptions.

Against this backdrop, the number of funds has shrunk, with Aegon and Aviva Investors liquidating their strategies last year and Abrdn merging its two real estate and feeder funds.

Now the Janus Henderson UK Property Paif has been added to the list of discontinuers, with the asset manager suspending the vehicle and its feeder fund ahead of the sale of the assets to a single buyer later this month/early April.

Janus Henderson’s move was prompted by upcoming regulatory changes, with the FCA pushing the Long Term Asset Fund (LTAF), a new open-ended structure with mandatory notice periods of 90 to 180 days, as a solution. the problem of inadequate liquidity of real estate funds.

Oli Creasey, real estate research analyst at Quilter Cheviot, says while Janus Henderson’s suspension “appears to be ad hoc”, the longer LTAF rules remain uncertain, the more likely “funds will consider their future”; which for some might involve liquidation.

“The [Janus Henderson] the suspension was originally triggered by news about this particular fund, not the sector, so in the short term we don’t think investors in other funds will be rushing out in the same way.

“That being said, it was partly the operating environment that prompted the Janus Henderson fund to pursue a sell-off in the first place, and we would be surprised if one or more other funds hadn’t at least considered doing something similar.”

Ordinary investors are not used to monthly liquidity

Fairview Investing founder and director Ben Yearsley believes the days of the UK direct property industry are numbered.

If the LTAF proposals were to pass, Yearsley says it’s fair to assume that daily-trading real estate funds would have to adhere to the same rules and adopt a minimum 90-day notice period. This would make them impractical for most D2C platforms, which lack the capabilities to offer non-daily trading funds.

“I think more funds will close because investment platforms and ordinary investors are not used to having monthly cash.

“The reality is that you don’t need daily cash. It just got to the point where it was expected, and no one built the feature to be able to cope any other way.

See also: Majority of retail investors would abandon real estate funds if the FCA introduced notice periods

UK property managers remain committed to the daily trading structure

Despite an uncertain outlook, major UK property fund providers said portfolio advisor they remain committed to the daily trading structure and are well equipped if investor sentiment deteriorates.

Legal & General Investment Management’s UK property fund, the largest in the industry with £2.4bn in assets, currently has around 17.4% cash.

“Fund size and liquidity have remained stable throughout 2021 and the funds are well positioned for future performance with an overweight to industrials and alternative sectors and an underweight to retail,” said Mike Barrie, director of fund management for LGIM Real Assets.

“We continue to review all existing and potential product offerings and the regulatory landscape to ensure they remain fit for purpose and meet current and future investor demand for continued access to the UK property market and the LGIM’s award-winning real estate fund management expertise.”

UK direct property fund cash levels

Funds Cash (%)
BMO Gam ownership in the UK 19.2
Canlife UK property 22.2
L&G UK Real Estate 17.4
M&G Property Portfolio 19.1
London Royal Property 8.4
SLI UK Real Estate 18.8
Threadneedle United Kingdom Paif 18.3
Source: Factsheets as of January 31, 2022

Abrdn says the £1.6bn merger of the Aberdeen Property fund with the SLI UK Real Estate fund has “simplified and enhanced our offering to investors by creating a significant scale, sector-diversified UK direct property fund, type of asset and stream of income/rent”.

“While the FCA’s consultation on the open-ended, daily-traded property fund sector is still ongoing, we are committed to delivering our offering in this area,” said George Shaw, Property Director of SLI UK.

“Direct real estate funds provide investors with much-needed diversification benefits when held as part of a multi-asset portfolio, and this has been particularly evident of late. We therefore intend to address all results of the FCA consultation in a collaborative manner through engagement with our existing investor base so that they can continue to benefit from an allocation to the sector in the future.

Inflation hedge

The managers were also keen to point out the inflationary benefits of the asset class, adding that it could lure investors back into the sector.

“Against the UK’s current economic headwinds of persistently rising inflation, rising interest and funding rates and an increasing tax burden, the UK property market is performing well, continuing to produce monthly growth in rents and capital in response to GDP growth forecasts. This reinforces professional demand and the weight of money wanting to buy property,” says Michael White, head of UK real estate at Canada Life Asset Management. .

“We see this continuing into 2022 unless geopolitical tensions, the economic cost of sanctions against Russia and an increased threat of war in Europe play out.”

BMO UK property manager Guy Glover echoed that sentiment, saying the fund is “positioned to capture the significant upturn in investor interest in commercial property in the UK, driven by investors looking alternatives to fixed income securities and those seeking the inflation protection that real assets provide”. ”.

But Creasey says he’s “somewhat cautious” about that view. “Inflation and real estate returns are correlated, but real estate is influenced more by other economic factors and therefore does not always protect against inflation. 2007-09 is a good example of this, when real estate values ​​fell sharply fell and showed no clear link with inflation.

Yearsley adds that while inflation is generally good for real assets like real estate, rising interest rates are not.

Hybrid funds are the way to go

Yearsley believes hybrid funds, which invest in a combination of direct real estate and listed real estate securities, are the way forward for the sector.

The £481.5m BMO Property Growth & Income fund currently operates a hybrid model, with around two-thirds of the portfolio invested in continental and UK property stocks and the other third in physical properties.

Last September, Time Investments also launched a hybrid vehicle, marking one of the first launches of new real estate funds in years.

Yearsley says he is surprised that Janus Henderson has not converted his UK Property Paif into a hybrid fund as they already have funds that invest in property stocks, including the Horizon Global Property Equities sicav.