The Financial Conduct Authority’s proposals for fund redemption notice periods are a positive step for open-ended investment companies, an area of the property investment industry that has needed help for years. But it marks a critical juncture for property investments in general, and the onus is on us all to ensure that the reputation of property investing, more broadly, is not sullied for institutional and retail investors as a result.
The big danger is that this current episode of fund gating, which follows the highly publicised gating scandal just four years ago, is construed as a problem with property sector investing. It is not. This is a fund structure issue, and it is one that has been clear to many in the industry for some time.
The real problem is that institutional investors want liquid exposure to high-quality real estate assets without day-to-day volatility. It is an understandable wish list, but a product that achieves all of this has been proven too good to be true.
And liquidity is not the only issue the FCA should look to address. The other major detraction of open-ended investment in property is its valuation schedule. It isn’t often talked about, but it is an issue that is perhaps as problematic as the liquidity paradox, because it adds fuel to the same fire.
Some investors don’t like the idea that listed property companies are exposed to market pricing, because it results in price volatility. The alternative, however, is that open-ended funds, whose assets are not for sale and therefore have no market price, have extremely stable valuations precisely because they value their assets once or twice a year.
This leads to smooth returns on a day-to-day basis, and while in technical terms this is “low risk”, it can lead to major fluctuations in value on a periodic basis because valuations can be up to 12 months out of date before they are corrected. For big institutional investors, like pension funds, whose model involves selling assets periodically to account for redemptions, the risk this poses can be grave.
Reputational damage
What the FCA chooses to scrutinise, however, is not the big issue here. The big issue is the imminent reputational damage to the concept of property investing. We are all responsible for ensuring that the reputation of this industry and this type of investment remains intact for the good of real estate, and big and small investors everywhere.
There has been huge fanfare around the fund gating scandals, which is no surprise. But people would be surprised to know how small the open-ended property fund industry, which grabs all the headlines, actually is. It is valued at less than $13bn. The listed property market in the UK is worth more than five times that at about $75bn (£57bn), and it is increasing rapidly. Vonovia, the German private residential business, is almost three times bigger than all of the UK open-ended property funds combined.
That is not to say the FCA’s intervention isn’t important. Safeguards and investor risk awareness are vital.
But the response from the media must be proportionate, and to achieve that the FCA and organisations like my own, EPRA, must speak out and remind the media and investors that there are other avenues of property investment that are far larger and more liquid.
Lessons from abroad
Open-ended investing in property should remain a viable option. It has its own characteristics and paradoxes, but this should not preclude its existence.
Instead, the UK can learn from other markets. In Germany, open-ended property investors have a 12-month redemption notice period. This hasn’t stopped the industry from existing – it has just made it safer for investors.
In my mind, it is no coincidence that Germany is Europe’s largest listed real estate market, with a market capitalisation of over $120bn, in the very same market that enforces 12-month redemption notice periods on open-ended investors. It is difficult to argue with this level of popularity and success, and perhaps it is time that the UK’s investors and businesses considered listed property more seriously.
This episode has been a lesson for everyone, and for anyone still in doubt, the only truly liquid exposure to real estate is listed real estate. But, amid emotion and frenzy, the key is to ensure that the next steps we take are productive ones for the entire property industry. If we fail to communicate and publicise other avenues of investment in real estate, then everyone, from listed real estate businesses and big private equity investors to individual pensioners and ISA owners, will be the losers.
Dominique Moerenhout is chief executive of the European Public Real Estate Association
