AJ Bell's Laith Khalaf suggested “there might not be too much of a property sector left
The recent suspension of Janus Henderson’s UK Property PAIF is “another nail in the coffin” for the open-ended UK direct property sector, which has faced outflows since its widespread suspensions, first in the wake of 2016’s Brexit vote and then as a result of 2020’s coronavirus lockdowns.
Janus Henderson's letter to investors explained that the closure of its £1bn fund was tied to the "ongoing uncertainty" around the future of the structure, as the industry awaits the Financial Conduct Authority's conclusion to its review of daily dealing products holding illiquid assets.
This review has "exacerbated redemptions", according to Rathbones head of multi-asset investments David Coombs, who questioned whether the sector's final moments were looming.
"We should be asking if the structure's days are numbered and if illiquid assets in retail daily dealing open-ended structures are appropriate at all," he said. "Property funds could continue to exist in the future under the proposed LTAF wrapper but will lose those investors who need/want daily liquidity."
In relation to property funds, current consensus around the LTAF wrapper predicts a mandatory notice period of anywhere between 90-180 days for funds, as a solution to the liquidity mismatch at the heart of the structure.
This answer could well be a death knell for the asset class. Oli Creasey, head of property research at Quilter Cheviot, said that if the requirement came at the top end of the scale, we may "see other funds throw in the towel".
"However, this outcome is not certain," he added. "There is a chance that the FCA discard this proposal or amend it to make it more workable."
Head of investment analysis at AJ Bell Laith Khalaf suggested that whatever answer is reached may not matter as waning confidence could mean "there might not be too much of a property sector left by the time the FCA decides on a course of action".
"The Janus Henderson Property fund is one of the bigger players in the market, so if they have decided running an open-ended property fund is not worth the candle, that is an ill omen for the rest of the sector," he said.
Communications director of the Association of Investment Companies Annabel Brodie-Smith added that the suspension marked "another nail in the coffin for open-ended property funds" and pointed to the "nearly £800m" of outflows from the IA UK Direct Property sector.
Janus Henderson has predicted it can complete the sale of its full portfolio to a single buyer by "the end of March/early April 2022", a much shorter wind-up than the currently closing property funds of Aegon and Aviva, which are approaching nine and ten months respectively.
Ruli Viljoen, head of manager selection at Morningstar, predicted that the fund house already had a buyer lined up, particularly given its public announcement, and suggested the property portfolio might wind up in the hands of a private equity provider, such as BlackRock, Blackstone, Cerberus, Elliot or Clearbell.
She added that while property remains an attractive investment solution, this fund closure may force managers to "rethink the structure of the investment vehicles used to offer property fund to investors".
Creasey added that companies such as Brookfield and Blackstone have bought "whole companies and portfolios for billions of pounds at a time", meaning the Janus Henderson portfolio is "well within their capacity".
"The portfolio has a significant industrial weighting, which is still in high demand," he explained. "We could imagine an investor coming in who values these and some other assets and is prepared to buy the whole and sell on anything not of strategic importance. That said it would probably not suit a specialist sector investor as the entire portfolio is diverse."
Ben Yearsley, director at Fairview Investing, argued that physical property funds have three choices from here on out: "Wind up, convert to an investment trust, or convert to a hybrid fund."
"I think the sector is dead," he added. "You have had three closures so far and I do not see any real way for it to survive."
