Investment groups managing £7.8tn are lobbying the UK government to introduce a fund structure that would make it easier for pension funds to invest in property without encountering the high-profile liquidity issues that have plagued retail investors in recent years.
The so-called “professional investor fund”, part of a submission from Britain’s top fund management trade body to the Treasury ahead of next week’s budget, is designed to boost the competitiveness of the UK fund industry post-Brexit by giving institutional investors greater flexibility over how they invest in real estate.
In a joint proposal published on Wednesday, the Investment Association and the Association of Real Estate Funds said there was “a clear gap” in the UK’s framework that puts the country at a disadvantage to international competitors.
Melville Rodrigues, partner at Charles Russell Speechlys and lead author of the IA proposal, said that investors looking for a hybrid strategy comprising elements of open-ended and closed-ended funds were being “forced offshore”. About 40 per cent of total fund assets invested in UK property are held in offshore funds, according to estimates from Property Funds Research.
Closed-ended funds are pools of capital comprising a fixed number of shares, whereas open-ended funds grow or shrink as investors move money in and out.
This feature of open-ended funds can have disruptive effects, as shown by the liquidity crises that have hobbled UK retail property funds in the past few years. The most recent fund to face a crunch was M&G’s £2.5bn Property Portfolio, which suspended trading in December after failing to keep pace with investor withdrawal requests.
Open-ended funds designed for professional investors offer less frequent liquidity to investors than retail funds, but their obligation to meet redemption requests nevertheless poses problems.
Stephen Palmer, director at DTZ Investors, which invests in property funds on behalf of UK pension funds, said that managing redemption requests could be a “distraction” for fund managers. In addition, the cash balances managers need to hold to meet withdrawals dilute returns.
Investing in closed-ended vehicles can also leave investors locked in a fund for a significant amount of time. Most property fund managers set time limits on their funds, but an increasing number are choosing to extend the duration of their funds, said Mr Palmer.
The IA and AREF proposal is for a closed-ended fund, units of which can be traded on the secondary market, without making investors liable for stamp duty land tax, as they are now.
Another way that investors can obtain exposure to property without facing the liquidity problems associated with open-ended funds is by buying shares in listed real estate investment trusts.
However, Mr Rodrigues noted that these vehicles do not always appeal to investors as they tend to move in the same direction as wider equity markets.
He added the proposed fund structure would “address the onshore fund gap and reduce barriers for new funds, enhancing the UK’s brand for fund and asset management”.
The new vehicle would also raise the profile of the UK internationally, positioning it as a base from where global property managers could manage funds for institutional investors, he said.
In its submission, the IA urged the Treasury to adopt its proposals — which also include the creation of a fund structure intended to give investors exposure to illiquid assets in return for less frequent trading terms — in order to “boost the global standing of the UK investment management industry” following the country’s withdrawal from the EU.
