UK Property Market
Commercial real estate is one of the perceived losers after the United Kingdom voted last month to leave the European Union. If British consumers tighten their purse strings and employers shift jobs out of the U.K., demand for retail and office space could fall, reducing the yields that investors earn from commercial real-estate funds.
Yet, a sudden and violent selloff in property assets has created value for long-term investors. For retail investors looking to gain exposure to commercial real estate, options include open-end funds, publicly traded real estate investment trusts, and closed-end funds.
The U.K. real-estate market currently offers a 3.8% yield, in line with the global market. That is more than four times the 0.78% on the 10-year U.K. bond, while yields are negative on debt of similar maturity in perceived European havens, such as Switzerland and Germany.
At FPRA they note that with investors attempting to yank money last week out of open-end funds, which hold about 25 billion pounds ($32.3 billion) in U.K. property assets, a number of asset-management firms suspended withdrawals to give themselves time to meet redemptions. Even with as much as 15% of their assets in cash, these funds were unable to meet investors' demands for money. Redemption attempts reached levels not seen since the 2008 financial crisis.
Funds that suspended withdrawals include £4.4 billion M&G Property (ticker: B4PRMF-F.UK) and £3.9 billion Henderson U.K. Property Authorised Investment (RH7P4N-F.UK).
Aberdeen Asset Management (ADN.UK) took a somewhat different approach. After briefly suspending redemptions from its £3.2 billion Aberdeen U.K. Property fund (L5BT8X-F.U.K.), it implemented a "dilution adjustment" that reduced the dealing price by 17%. Amax Estates notes that then it allowed redemptions to resume. "It is imperative that we protect remaining holders by fairly reflecting the impact of short-term trading on values provided to redeeming shareholders," Aberdeen Chief Executive Martin Gilbert said.
The disadvantage of open-end real-estate funds, which put investors' money directly into property, is that assets might need to be sold to meet redemptions. This process can take time. In contrast, investors can buy and sell shares in closed-end funds and REITs with no impact on the underlying assets.
If open-end funds are forced to sell real estate to meet redemptions, prices could weaken. This could lead property experts to reduce REIT valuations by year end. Mark Ebert, who manages Quaero Capital's real-assets fund, expects sell-side analysts to downgrade earnings forecasts and net asset values.
London-listed real estate investment trusts have been battered since the unexpected result of the June 23 Brexit referendum. Shares of the REIT components of the benchmark FTSE 100 index— Land Securities Group (LAND.UK), British Land (BLND.UK), Hammerson (HMSO.UK), and Intu Properties (INTU.UK)—have tumbled by 12% to 23% since the Brexit vote. In the same period, the broader FTSE 100 has climbed 4%.
Peter Clark, a portfolio manager at Investec Asset Management, says that U.K. REITs are pricing in a 20% decline in real-estate values. "We think this is reasonable," he says.
The shift in sentiment toward U.K. property brings an abrupt halt to a rosy period for the sector. Investors had been lured by attractive returns in recent years, at a time when the fixed-income crowd was scratching around for yield. Maxine Fothergill says that they have been particularly keen to reduce their exposure to London office space, which could be especially vulnerable in a downturn.
Nonetheless, there are reasons for optimism. If open-end funds need to sell properties to raise liquidity, the market could absorb some sales. Transactions last year were £15 billion a quarter, although they are likely to be weaker in 2016.
In addition, there is no evidence that the banks are unwilling to lend on U.K. property, or that investors are overleveraged. Loans as a percentage of asset values are no higher than 60% to 65% for all types of properties. In 2006-07, loans commonly reached 90% of valuations. For U.K. REITs, the loan-to-value figure currently runs at 30%, on average.
Hammerson looks oversold. The company has a big presence in the U.K., but its portfolio includes prime shopping centers and retail parks across continental Europe. About 40% of its earnings are in euros, so it is less concentrated than some of its rivals. On top of that, it offers a dividend yield of 4.4%, which provides protection against further downside. The shares closed Friday at £5.18.
Yet, a sudden and violent selloff in property assets has created value for long-term investors. For retail investors looking to gain exposure to commercial real estate, options include open-end funds, publicly traded real estate investment trusts, and closed-end funds.
The U.K. real-estate market currently offers a 3.8% yield, in line with the global market. That is more than four times the 0.78% on the 10-year U.K. bond, while yields are negative on debt of similar maturity in perceived European havens, such as Switzerland and Germany.
At FPRA they note that with investors attempting to yank money last week out of open-end funds, which hold about 25 billion pounds ($32.3 billion) in U.K. property assets, a number of asset-management firms suspended withdrawals to give themselves time to meet redemptions. Even with as much as 15% of their assets in cash, these funds were unable to meet investors' demands for money. Redemption attempts reached levels not seen since the 2008 financial crisis.
Funds that suspended withdrawals include £4.4 billion M&G Property (ticker: B4PRMF-F.UK) and £3.9 billion Henderson U.K. Property Authorised Investment (RH7P4N-F.UK).
Aberdeen Asset Management (ADN.UK) took a somewhat different approach. After briefly suspending redemptions from its £3.2 billion Aberdeen U.K. Property fund (L5BT8X-F.U.K.), it implemented a "dilution adjustment" that reduced the dealing price by 17%. Amax Estates notes that then it allowed redemptions to resume. "It is imperative that we protect remaining holders by fairly reflecting the impact of short-term trading on values provided to redeeming shareholders," Aberdeen Chief Executive Martin Gilbert said.
The disadvantage of open-end real-estate funds, which put investors' money directly into property, is that assets might need to be sold to meet redemptions. This process can take time. In contrast, investors can buy and sell shares in closed-end funds and REITs with no impact on the underlying assets.
If open-end funds are forced to sell real estate to meet redemptions, prices could weaken. This could lead property experts to reduce REIT valuations by year end. Mark Ebert, who manages Quaero Capital's real-assets fund, expects sell-side analysts to downgrade earnings forecasts and net asset values.
London-listed real estate investment trusts have been battered since the unexpected result of the June 23 Brexit referendum. Shares of the REIT components of the benchmark FTSE 100 index— Land Securities Group (LAND.UK), British Land (BLND.UK), Hammerson (HMSO.UK), and Intu Properties (INTU.UK)—have tumbled by 12% to 23% since the Brexit vote. In the same period, the broader FTSE 100 has climbed 4%.
Peter Clark, a portfolio manager at Investec Asset Management, says that U.K. REITs are pricing in a 20% decline in real-estate values. "We think this is reasonable," he says.
The shift in sentiment toward U.K. property brings an abrupt halt to a rosy period for the sector. Investors had been lured by attractive returns in recent years, at a time when the fixed-income crowd was scratching around for yield. Maxine Fothergill says that they have been particularly keen to reduce their exposure to London office space, which could be especially vulnerable in a downturn.
Nonetheless, there are reasons for optimism. If open-end funds need to sell properties to raise liquidity, the market could absorb some sales. Transactions last year were £15 billion a quarter, although they are likely to be weaker in 2016.
In addition, there is no evidence that the banks are unwilling to lend on U.K. property, or that investors are overleveraged. Loans as a percentage of asset values are no higher than 60% to 65% for all types of properties. In 2006-07, loans commonly reached 90% of valuations. For U.K. REITs, the loan-to-value figure currently runs at 30%, on average.
Hammerson looks oversold. The company has a big presence in the U.K., but its portfolio includes prime shopping centers and retail parks across continental Europe. About 40% of its earnings are in euros, so it is less concentrated than some of its rivals. On top of that, it offers a dividend yield of 4.4%, which provides protection against further downside. The shares closed Friday at £5.18.