Rathbones' Coombs calls for innovation as suspended property funds prepare for 'significant' write-downs
RICS assurance offers glimmer of hope
Innovation is needed within the UK property fund market to offer greater flexibility, diversification and protection for investors, according to head of multi-asset investments at Rathbones David Coombs, who is expecting substantial write-downs in the values of open-ended UK property vehicles when they eventually end their ongoing suspensions.
A number of funds across the IA UK Direct Property sector remain suspended owing to material uncertainty in the valuation of underlying holdings in the wake of the coronavirus pandemic, with billions of pounds of investor capital locked up in the vehicles since early March.
However, the path towards reopening appears to be clearing, with the Royal Institution of Chartered Surveyors (RICS) having recommended a "general lifting" of material valuation uncertainty on a range of property sub sectors last week (9 September).
While fund suspensions remain in place, RICS has said there no longer remains the same material uncertainty in "all UK real estate", excluding "some assets valued with reference to trading potential" such as within some leisure and hospitality assets.
SJP and Columbia Threadneedle property funds emerge from suspension but others 'could take months'
Speaking to Investment Week, Coombs pointed to the performance of vehicles in the REIT market, with the Association of Investment Companies' Property - UK Commercial sector down 19.5% year-to-date, according to FE fundinfo.
Coombs said that while he does not expect the open-ended property funds to be "marked down as far as that" upon reopening, he expects the valuation write-downs to be "significant".
Office and retail property, which were arguably the areas of the property market most impacted by lockdown measures in response to the pandemic, represent significant proportions of the IA UK Direct Property sector's exposure, averaging 21.6% and 12.8% of portfolios respectively, according to data from FE fundinfo.
Coombs said: "If you were selling a big retail unit today, for example, I would suspect it would be significantly lower [in price] than it would have been in the middle of last year.
"If you are selling a 30/40-storey skyscraper in Canary Wharf today, I would expect it to be [valued] significantly lower - perhaps 20% or 30% lower - than it would have been in February.
"If you look at the valuation of those suspended funds, those valuations are wrong, and the market value of those underlying assets is significantly lower than the suspended price."
Structure
Coombs also noted that while these funds will have to sell assets upon reopening at a discount, this would be "fairer" than "suspending them month after month" owing to liquidity concerns, such as those seen in the wake of the Brexit referendum in 2016 and more recently in 2018.
In August, the Financial Conduct Authority (FCA) finally opted to take action on the "liquidity mismatch" inherent in the open-ended property fund structure with proposals that included the introduction of a 180-day notice period for redemptions.
The proposals were welcomed by open-ended property fund providers such as Aegon Asset Management (formerly Kames Capital), with co-manager of the Aegon Property Income fund Richard Peacock commenting they would encourage long-term investment horizons while allowing managers "to hold lower cash weightings, [and] buy and sell assets in a disciplined manner in response to flows".
Cash weightings in the sector have been a source of discomfort for fund buyers in recent times, with funds in the IA UK Direct Property sector averaging a weighting of 16.5% at the end of August.
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