Sadly we have arrived at the end of the Welsh football dream. Ronaldo has cruelly forced me to return from France and join everyone else in pondering the impact of Brexit on real estate.
Certainly, Brexit is bad for our sector, but I don’t feel we are in 2008 again.
Blocking redemptions from £15bn or more of open-ended funds casts the whole sector in a negative light. The inference is that the underlying properties have crashed in value and cannot be sold. This is not the case.
The reality is that these open-ended funds are not fit for purpose. Their predicament is structural rather than purely caused by the market or Brexit. They purport to offer retail investors liquidity in an illiquid asset class. They don’t.
Cash and liquidity management is critical in any business and your assets and liabilities need to be matched. Northern Rock was a case in point – it had a solid long-dated mortgage book, but went bankrupt as it relied on short-term funding that it could not renew in a credit crisis.
The open-ended funds that have been frozen are the same. They claim to be liquid, but in reality this is limited to a finite cash buffer that cannot deal with significant investor redemptions. Would you buy a car where the brakes only work on flat roads and not on steep hills?
Their structure failed in the credit crisis, with redemption restrictions that lasted years in some cases, and it appears that nothing has been done by the fund managers or regulators to address this issue.
Surely REITs are a better structure for retail investors? Despite the recent collapse in share prices, they offer liquidity – investors can sell shares without the need to liquidate the underlying properties – high levels of transparency and good corporate governance.
So where are the underlying property markets? The honest answer is that nobody truly knows.
The value of an asset is conditioned by its rental income but also the confidence of investors. Assessing the evolution of investor sentiment is always hard, especially so close to a major event that has many potential repercussions. I suspect that any renewal in confidence will take time and additional political clarity is likely to be an essential precursor. In the interim there will probably be very limited transactional activity.
I don’t perceive there are many truly forced sellers, despite redemption pressures on certain funds, and while there is a lot of cash available to invest, I anticipate they will be cautious in their approach unless there are obvious bargains. The bid-offer spreads are likely to be too wide to see many deals concluded.
However, there could be another scenario.
Real estate offers an attractive yield relative to cash, bonds and borrowing costs. What is the appropriate yield for real estate in what now appears to be a long-term “zero” interest rate environment?
The investment industry relies on income. Real estate is one of the asset classes that can deliver this. Could we see a re-rating of income assets lead to a rapidly recovering real estate sector, albeit with a focus on income rather than capital growth? Am I overly optimistic? Possibly.
Then again, you probably didn’t believe Wales would make the semi-finals of Euro 2016.
Morgan Garfield, managing director, Ellandi
