Real estate investment markets are like most others. They depend on buyers and sellers to work with some semblance of efficiency. Currently, buying and selling intentions appear as polarised as the leave and remain sides of the Brexit debate. What does this mean for real estate investment jobs and property investment managers?
The Bear Market Story
A story in the Financial News, and published on March 7th, described how “Money pours from UK property funds ahead of Brexit”. In February, investors pulled more than £150 million from UK and offshore domiciled funds, according to the Fund Flow Index. The company that runs the index, Calastone, says that the total outflow of funds between October 2018 and February 2019 now amounts to £1.1 billion. It points out that this is as much as was withdrawn in almost an entire year between 2016 and 2017.
Edward Glyn, Head of Global Relationship Management at Calastone told Financial News that Brexit seems to be the real issue. He said, “It’s clear investors are very pessimistic about the impact of Brexit on the sector’s prospects.”
However, he also hinted at withdrawals being exacerbated because of recent experience when he commented, “But investors may also have been mindful in the last few months of the difficulty they faced getting their money out of real estate funds in the aftermath of the 2016 referendum. To avoid getting trapped again after the end of March, prudence may have dictated that they act well ahead of time.”
Companies such as Janus Henderson and Columbia Threadneedle have moved from a quoted spread basis to a full spread basis. Reasons for doing so include ‘to promote long-term investment’ and ‘to simplify the pricing structure’ and ‘provide greater clarity regarding buy and sell prices’.
This type of pricing adjustment may indicate that fund valuations could move lower. Redemptions may rise, and funds be gated, as they were in 2016 following the EU referendum.
Some industry commentators are warning that open-ended UK property funds could come under severe pressure. Luke Hyde-Smith, Head of Fund Selection at Waverton Investment Management, warns that, “As for the current climate, if we get a no-deal Brexit, open-ended funds are going to be a car crash.”
Property Market Bulls
Not all investors are bearish of the prospects for UK real estate. Some are holding fire. Some are actively seeking to expand portfolios. Others have launched new UK property funds.
While investment by wealth funds via private equity fell last year (according to PitchBook), Abu Dhabi’s Mubadala Investment is one of several large sovereign funds that told Reuters its commitment to the UK remained unchanged. Its largest exposure is to UK real estate, and it has made no changes to its strategy or portfolio because of Brexit.
Salboy Ltd., currently investing heavily in regeneration projects in Manchester, says that investors from the UAE remain unfazed by Brexit. It believes that UK real estate products will continue to attract regional buyers. Ahead of presenting at Cityscape Abu Dhabi, Salboy’s sales manager Kevin Eyres said that attendees are “knowledgeable, experienced and curious about the best way to expand their UK property portfolios,” and that he anticipates Salboy’s experience of interest from UAE investors to be repeated.
Meanwhile, Norway’s £750 billion sovereign wealth fund – the world’s largest – announced in February that it plans to increase its UK investments, and is unconcerned by Brexit. 8.5% of the fund is currently invested in UK equities, bonds and real estate. In recent months, several new real estate funds have been launched.
These include Cabot Properties’ first ever UK-focused fund. It is raising approximately $£150 million to plough into the Cabot UK Core-Plus Industrial Fund. Pennsylvania Public School Employees’ Retirement Scheme has pledged around £37 million ($50 million). At the end of January, UBS launched a long income UK property fund with an initial commitment of £90 million. The seed portfolio is in hotel assets, with funds committed by a ‘major UK local government pension plan’.
Brexit appears to be concentrating investment thinking as much as it has political thinking. You are either in or out, though some continue to sit on the fence. Currently, it seems that the ‘Noes have it, the noes have it’ (to quote the speaker of the House of Commons), but the ayes are putting up a good fight.
Heavyweights such as Norway’s sovereign fund are confident in the UK’s ability to weather any Brexit storm, and some smaller players are eager to get into the market.
- While Calastone has reported £1.1 billion of funds outflowing between October 2018 and February 2019, this should, perhaps, be put into some context:
- The outflow happened during a period of extreme volatility for equity markets
- Most market observers at that time were forecasting imminent increases in interest rates
- The average outflow during the October to January period was £236 million
In February, the outflow was more than a third lower than the average during the previous four months. While it is still an outflow of funds, this is quite a drop in the rate of withdrawal.
Overall, we feel that real estate may be travelling on a rocky road, but those funds that are taking the long view are probably most likely to outperform. With such a diversity of investment ideas, the opportunities for property fund managers could be very exciting in the coming months.
We’d love to hear what you think. Contact the Real Estate Investment & Funds team here at Macdonald & Company