The valuation uncertainty that led to a raft of UK direct property funds suspending as the coronavirus outbreak took hold is showing signs of easing thanks to more transactions and updated guidelines for the industry on property valuations.
Combined with the easing of UK government lockdown restrictions, the changes could see funds in the Investment Association UK Direct Property sector reopen by the end of summer, having suspended in March, beginning with Kames Property Income, as independent valuers faced material uncertainty over valuations due to the coronavirus.
The suspensions have also spread to institutional funds for the first time, according to Reuters.
In an update for investors last week, Janus Henderson Property fund manager Ainslie McLennan said that three assets in the portfolio were no longer affected by material uncertainty around valuations due to an update from the Royal Institute of Chartered Surveyors.
The professional body determined that long-dated income assets with leases of at least 20 years were no longer privy to the clause. For Janus Henderson that represented approximately 4% of the fund, including: Tesco in Hythe, Lidl in High Wycombe and Sainsbury’s in Ripley, Derbyshire.
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Could property funds reopen over summer?
That wasn’t the only clause that has been changed, although it was the only one to affect the Janus Henderson portfolio.
Primary healthcare, which excludes care homes, and ground rents are also no longer hit by the material uncertainty clause.
Fairview Investment consultant Ben Yearsley says it is interesting that the guidance around material valuation uncertainty has been reduced in some sectors and gives an indication that funds in the Investment Association UK Direct Property sector could be on their way towards lifting suspensions.
“By July, if things go to plan, all shops would have been able to reopen and I presume they’ll plan for the end of June for restaurants and pubs to reopen.”
Yearsley reckons it wouldn’t take long after that for funds to lift suspensions.
Reuters pegged the lifting of suspensions to happen in September, citing unnamed industry sources.
> See also: Reits face same uncertainty that prompted raft of property funds suspensions
How lockdown has affected property transactions
Already the easing of UK government’s lockdown has facilitated a pick-up in transactions with McLennan saying surveys and viewings can now take place, helping the property market to function again “albeit slowly”.
“We have seen transaction activity in the market for larger lot sizes or more ‘trophy’ style assets. There is still a lack of valuation evidence coming through, even in markets that you would think were more liquid.”
Portfolio Adviser asked a number of asset managers running open-ended property funds whether they had completed any transactions but none responded. BMO Real Estate Partners fund manager Guy Glover says there have been “very few” transactions across the market given the restrictions on being able to do due diligence.
Jake Moeller, senior investment consultant, Square Mile Investment Consulting and Research says: “Travel restrictions and social distancing materially affect inspections, valuations, maintenance and due-diligence generally. As these restrictions are eased, transactions that have been delayed will flow through the pipeline again.”
McLennan said in her investor presentation that “some” deals took place in the Janus Henderson portfolio at the end of April.
In the investment trust space, several transactions have taken place, notes Winterflood Investment Trusts research analyst Emma Bird.
The Custodian Reit disposed of an industrial warehouse unit securing 23% more than the 31 March valuation. The AEW UK Reit sold its largest asset and the Supermarket Income Reit acquired a portfolio of Sainsbury’s supermarkets via a joint venture.
Property investors may have to compete to keep their buildings let
Momentum Global Investment Management portfolio manager Alex Harvey reckons transactions will remain at low levels in the short term even as lockdown is lifted.
Harvey says: “Retailers will have to re-open with new social distancing rules resulting in lower footfall, so there is little immediate upside for them, but they can at least service their rents.
“In terms of offices, business will continue to pay rent but may look to downsize once their leases expire. As a result, heavy supply and changing demand patterns may result in a fall in rents across the sector as landlords compete to keep their buildings let.”
Slowing economic growth is another headwind for rental growth, he says.
Residential looking more positive while leisure divides opinion
McLennan says the valuers are removing the uncertainty clause sector by sector as they see transactions, and therefore valuation evidence, come through.
Financial Conduct Authority rules introduced last year require that a fund suspends when there is uncertainty around valuations in 20% or more of the fund.
Leisure is an area she expects to remain vulnerable “for some time” even as the lockdown lifts. She names it has the area where Janus Henderson has been “most tested” in terms of rent collection.
“Our rent collection overall has been relatively steady, but leisure has been an area where we are seeing some of the more frequent deferments coming through for rent.”
Legal & General Investment Management sounds slightly more positive on the sector, albeit with a longer term view.
“Restrictions on trading are leading most operators to shut down most, if not all, of their operations,” says LGIM head of real assets Bill Hughes. “However, we see enduring demand for leisure in the broadest sense, supported by a basic necessity for physical presence.”
Hughes takes a similar view on hospitality.
But the pandemic could have a positive effect on residential property, argues Harvey. “As remote working becomes more entrenched demand for home working space will increase and if commuting rates go down we will see demand for more out of town living.”
LGIM is seeing resilience in its build-to-rent assets with occupancy and rent collection remaining high, says Hughes.
Performance across the investment trust space has been varied, notes Bird.
Property investment trusts with high retail or leisure exposure have seen their share prices crash and, in some cases, have suspended or cut dividends. But she points out the Supermarket Income Reit has remained resilient as supermarkets remain open, as have funds with government-backed rental income, such as Civitas Social Housing and the Triple Point Social Housing Reit.
Yearsley says specialist investment trusts could be one way to access a sector that is otherwise challenged. “But you wouldn’t just hold one; you’d want a few in your portfolio to diversify risk.”
