Janus Henderson UK Property PAIF having recently confirmed that it has accepted the sale of its property portfolio, investors in the fund wishing to retain exposure to this asset class may be wondering where to invest the proceeds.
Open-ended direct property funds have been in decline since their assets under management peaked at £22.0 billion in May 2016, just before the UK’s vote to leave the EU. At the end of March 2022, they had assets of just £9.1bn, or around £8.1bn excluding the Janus Henderson fund, which will soon be closed.
Meanwhile, the assets of closed-end property investment companies, most of which are structured as REITs, nearly tripled from £8.3bn in assets in May 2016 to £22.3bn. sterling at the end of March this year. A REIT – or real estate investment trust – for the purposes of this article is an investment company which complies with UK HMRC rules for maintaining UK REIT status.
Closed-end real estate funds have thrived
While open-end real estate funds have been hampered by the issue of trading halts, real estate investment trusts have thrived. Investment companies in the AIC Property – UK Commercial sector have generated an average return of 226% in the ten years to March 2022, compared to 161% for open funds in the IA UK Direct Property sector.
Pierre-Richard, chief executive of the Association of Investment Companies (AIC), said: “The open-ended structure has repeatedly encountered difficulties with direct real estate investments. Investors have seen many suspensions – during the global financial crisis, following the EU referendum and, more recently, during the coronavirus pandemic.
Stone said the AIC is still waiting for the FCA to announce its findings on the possible introduction of notice periods for open-ended real estate funds to try to address these liquidity mismatches, but in the meantime, he said. he said, it seems investors are voting with their feet.
“The sale of assets held by the Janus Henderson UK Property PAIF marks another move away from open-ended funds investing in this asset class,” he explained. “Real estate is a distinct and important asset class that has generated strong returns for investors and can form an important part of a diversified investment portfolio. The decline of open-ended real estate funds should not be a reason for investors to avoid this asset class.
Which real estate funds should investors turn to?
The AIC said investors who still want exposure to real estate should consider real estate investment firms that have a solid, proven track record and structure. “In times of market stress, you can expect the share price to fall, but the fund manager is under no pressure to sell the underlying assets to meet redemptions, and shares are tradable whenever the stock market is open,” Stone said.
The investment company structure removes the pressure of managing capital flows and is the main driver of real estate investment companies’ ability to generate strong returns over the long term. They can be fully invested without having to hold cash to meet redemptions and will never be forced to sell properties in times of market stress.
For the same reason, property investment companies can also generate higher levels of income: for example, the average return for the AIC UK commercial property sector is currently 4.5%. The REIT structure of these companies allows income to be passed on to investors in a tax-efficient manner, especially when the shares are held in an ISA or pension.