With Janus Henderson UK Property PAIF recently confirming that it has agreed a sale of its property portfolio, investors in the fund wanting to retain exposure to this asset class may be wondering where to invest the proceeds.
Open-ended direct property funds have been in decline since their assets under management peaked at £22.0 billion in May 2016, just before the UK’s vote to leave the EU. At the end of March 2022 they had assets of just £9.1 billion, or approximately £8.1 billion excluding the soon-to-be-terminated Janus Henderson fund.
Meanwhile, assets in closed-ended property investment companies, most of which are structured as REITs, have almost tripled from £8.3 billion of assets in May 2016 to £22.3 billion by the end of March this year. A REIT – or real estate investment trust – for the purposes of this article is an investment company which conforms to the UK HMRC’s rules for maintaining UK REIT status.
Closed-ended property funds have thrived
While open-ended property funds have been dogged by the problem of trading suspensions, property investment companies have thrived. Investment companies in the AIC Property – UK Commercial sector returned an average of 226% in the ten years to March 2022, compared to 161% for open-ended funds in the IA UK Direct Property sector.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The open-ended structure has repeatedly struggled with direct property investments. Investors have experienced numerous suspensions – in the global financial crisis, following the EU referendum, and most recently during the coronavirus pandemic.”
Stone said the AIC is still waiting for the FCA to announce its conclusions on the possible introduction of notice periods for open-ended property funds to try and address those liquidity mismatches, but in the meantime, he said, it appears that investors are voting with their feet.
“The sale of the assets held by the Janus Henderson UK Property PAIF marks another move away from open-ended funds investing in this asset class,” he explained. “Property is a distinct and important asset class that has delivered strong returns for investors and it can form an important part of a diversified investment portfolio. The decline of open-ended property funds should not be a reason for investors to avoid this asset class.”
Which property funds should investors be looking at?
The AIC said that investors who still want exposure to property should consider property investment companies which have a robust, proven structure and track record. “During times of market stress you can expect the share price to fall, but the fund manager is under no pressure to sell the underlying assets to meet redemptions, and the shares are tradeable whenever the stock market is open,” Stone said.
The structure of investment companies removes the pressure to manage capital flows and is the primary driver of property investment companies’ ability to deliver strong returns over the long term. They can be fully invested without having to hold cash to meet redemptions, and will never be forced to sell properties at times of market stress.
For the same reason, property investment companies can also deliver higher levels of income: for example, the average yield of the AIC UK commercial property sector is currently 4.5%. The REIT structure of these companies enables income to be passed through to investors in a tax-efficient way, especially when shares are held in an ISA or a pension.