The Association of Real Estate Funds (AREF) has laid out a case for why the difficulties that have hit property OEICs may be highly overstated.
The suitability of open-ended structures for property funds has been brought firmly into question over recent years.
In the market turmoil that followed the Brexit referendum in 2016 some of the biggest property OEICs shut the gates on withdrawals, badly shaking investors’ faith in the products.
The issue flared up again this year as interest rates spiking saw investors try to rush for the door. The most recent turmoil was enough to prompt some major funds to shutter permanently this time, including the once-mighty M&G Property Portfolio.
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Managing director of AREF Paul Richards acknowledged these difficulties during an online presentation on 29 November, but argued these have been rare occurrences when considered in the full context of open-ended property funds’ existence.
Richards noted that quarterly dealing property funds were not gated in the 2008 global financial crisis despite market turmoil. He added that suspensions during the Covid-triggered crash of 2020 were due to a freezing up of property pricing generally due to lockdowns, rather than daily liquidity related issues.
“That was a totally different issue,” he said. “That was pandemic issue, not a liquidity issue.”
He also highlighted the crucial distinction between daily traded funds and those with monthly or quarterly lock-ups, which have not run into trouble.
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Richards added that long-term savers should have little or no requirement for daily dealing.
Turning to the subject of returns, Richards quoted figures showing the 10-year average return from the IA property sector has been 25.2%. This is higher than corporate bonds at 18% and index-linked bonds at 4.3%, he noted. It falls short of the UK all companies equities sector though which has returned 45%.
Richards pointed out low correlation with other assets and differentiated income streams as benefits beyond the return figure taken in isolation.
Ineffective regulation has also played a role in the troubles faced by daily dealing property funds, Richards explained, but this is fixable in his view. Improvements to rules around liquidity management tools could provide a welcome boost, he noted.
Investment platforms also have a crucial role to play, Richards continued. He sees significant room for improvement in how they deliver property funds to retail clients.
Platforms facilitating access to property funds with monthly or quarterly dealing could breath new life into the asset class, for example.
Another key plank of Richards’ argument that there is still plenty of life in the products is that the success these funds have had with institutional investors shows the asset class itself is not unworkable in its open-ended form.
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Defined benefit pension funds for example typically deal monthly or quarterly, and have strong long term liquidity management practices.
An important focus for the investment industry now should be transferring this approach to property investing to defined contribution schemes. This is ‘a trillion pound opportunity’ in Richards’ view.
