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House sales tumble over uncertainty about Brexit

HOUSE sales in parts of London have fallen more than 40 per cent since the Brexit vote, according to latest figures.

The average across Britain was also found to be down — nine per cent — after sales in the 12 months before the vote in June 2016 were compared with the 12 months leading up to May this year by the Yorkshire Building Society.

It found the London boroughs of Brent, Kensington and Chelsea, and Westminster boroughs saw a fall of between 39 and 43 per cent.

However, it wasn’t all bad news as parts of the country saw sales increase. Torfaen, in southern Wales, for example, saw a surge of 45 per cent.

Yorkshire’s Nitesh Patel said: ‘The housing market has become more stagnant in the UK as a whole since the EU referendum. But, when we break down the analysis to a regional and local level, the picture becomes more complex.’

Drops in London could be down to investors and overseas buyers being put off by the political uncertainty, he said. High prices and low supply were also affecting the market in the south-east. The east of England and the midlands also fared badly.

However, parts of the north, Wales, Scotland and Northern Ireland saw ‘significant house sales growth’.

Mr Patel said rising wages and record full-time employment have made buying a home generally more affordable.

He added: ‘This downturn is likely to be a temporary phenomenon which will continue while uncertainty around Brexit exists.’

By Vicky Shaw

Source: Metro News

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Leasehold scandal pushes freehold house price premiums to eight year high

The price premium being paid for a freehold property by home buyers in England and Wales is at its highest since 2011, enhanced by issues relating to leaseholds, new research suggests.

Using property transaction data, estate agents Benham and Reeves found that the price gap between a leasehold and freehold property was 14.3% in 2011, dropping consistently year on year to just 5% in 2014.

It then increased to 6.9% in 2015 and stayed at around this level before increasing last year in the wake of the leasehold scandal. So far in 2019, the gap has widened from 8.3% in 2018 to a notable 12.3% this year.

Freehold has historically been the preferred method of buying as the home buyer owns the property and the land it sits on and isn’t required to pay any ground rent of service charges. It also means you pay lower conveyancing costs when buying.

However, just over a year ago a leasehold scandal saw new homes sold with soaring ground rents as a result of developers selling freeholds on behind the back of sellers, and this has clearly had an impact with homebuyers paying even more to avoid such a situation.

The largest freehold price gaps are in London’s prime market, with Camden home to the highest with a 227% increase while in Kensington and Chelsea, the average price paid for a freehold property is £4.4 million, some 190% higher than the average price paid for a leasehold at £1.5 million.

Home buyers in Elmbridge are paying 159% more for a freehold, followed by the City of Westminster, Islington and Hammersmith and Fulham.

While London is home to the majority of the largest gaps, Chiltern is home to the next largest freehold price premium outside of the capital at 105%, with South Buckinghamshire also ranking in the top 10 with a 92% freehold property premium.

Despite last year’s revelations, there are still two areas where home buyers are paying more for leasehold homes. Tameside and Sunderland are home to an average price paid for leasehold homes some 6% and 4% higher than freeholds.

‘There is no doubt that the leasehold scandal has had a severe impact on buyer sentiment and the amount people are willing to pay to avoid any of the potential nightmares that unfolded last year,’ said Marc von Grundherr, director of Benham and Reeves.

So much so that the premium paid for a freehold home has already hit its highest levels in nearly a decade and will no doubt continue to do so. A freehold is always the preferable path when buying but unfortunately, not everyone can secure themselves a foot on the freehold ladder, either due to a lack of stock or the additional financial cost,’ he added.

Source: Property Wire

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Interest in Right to Buy grows

There has been a growing interest in the government’s Right to Buy scheme as data showed brokers searched for lenders’ criteria on the scheme more times in July than any other previous month.

The data from Knowledge Bank, a criteria searching system for mortgage brokers, showed Right to Buy was the fourth most searched for lender criteria in July — the first time it had ever appeared in the top five searches.

According to the searching system, the rise in searches followed prime minister Boris Johnson’s hints earlier this month that he wanted to extend the Right to Buy scheme to housing association tenants, having previously suggesting it had no place in modern housing policy.

The scheme currently exists for council tenants to buy their properties at a discount, the size of which is determined by how long the tenant has lived in the property.

Tenants can apply to buy their council home if it’s their only or main home, they are a secure tenant, have no legal issues with debt and they have had a public sector landlord for three years.

The discount for a house ranges between 35 per cent and 70 per cent depending on how long the tenant has been a resident there, while for a flat the discount sits between 50 per cent and 70 per cent.

Chris Sykes, mortgage adviser at Private Finance, thought consumers were asking their broker about Right to Buy because they were looking for security in the lead up to Brexit, coupled with low house prices and attractive mortgage deals increasing the number of consumers who could potentially afford their property.

But Sarah Drakard, independent financial adviser at Cruze Financial Solutions, thought it was more likely down to a rise in the number of young potential property owners who had struggled to get on the housing ladder, trying “any means possible” to achieve that goal.

She said: “I have experienced young professionals, who may have been tenants within a family member’s council home for a few years, try and get on the housing ladder using Right to Buy.

“Perhaps where younger people are seeing there are no other options and they’re just trying to make Right to Buy work.”

Knowledge Bank’s findings also showed interest-only mortgages appeared for the first time in a year, mirroring research earlier this month which showed brokers thought interest-only products were still popular and accounted for about a fifth of sales.

Most searched-for lending criteria by brokers, in each mortgage market
 RESIDENTIALBUY-TO-LETSECOND CHARGEEQUITY RELEASE
1Maximum age at end of termFirst-time landlordMaximum loan-to-valueGrade II listed buildings
2Self-employed – one year accountsLending to limited companiesMortgage or secured loan arrears or defaultsEx-local authority houses
3Defaults – Registered in the last three yearsMinimum income – interest only/Part and part single applicantCapital raising – business purposes on second chargesSolar panels
4Right to BuyRequirement to be a homeownerMixed-use properties/part commercialEx-local authority flats
5Interest-onlyFirst-time buyersPayday loansNon-standard construction

Ms Drakard said she was “increasingly seeing” older and more experienced borrowers opting for interest-only mortgages, while Mr Sykes said there was “definitely more flexibility” with lenders in the interest-only space.

Mr Sykes said: “It’s more of a professional client or an older borrower opting for interest-only products. I think it’s down to people wanting to make sure they have affordability in the future if anything does happen, to keep their monthly costs down.”

In the buy-to-let sector ‘first-time landlord’ and ‘first-time buyers’ both made the top five search in terms of buy-to-let. 

Mr Sykes thought this was down to the fact first-time landlords market was very niche, so brokers had to do more research, but also because more first-time buyers were opting for the buy-to-let sector over the residential market at the moment.

He said: “I’ve got a few clients who cannot afford to buy in London, particularly the type of property they want, but are keen to get on the housing ladder.

“One way they get around this is to purchase a buy-to-let property up North, perhaps in their university city, and rent it out. This way they’re on the property ladder and get an income from it, but get to stay renting somewhere central in the city.”

According to Ms Drakard, the reason more first-time landlords were coming to the market was because more experienced landlords were holding off on increasing their portfolios due to the “tricky” buy-to-let landscape at the moment.

Landlords have experienced multiple tax and regulatory changes in the past few years — from a 3 per cent surcharge in stamp duty to reduced mortgage relief — which has triggered a number of landlords to sell up.

Nicola Firth, chief executive of Knowledge Bank, said: “Our tracker reveals a few shifts this month with interest-only making an appearance in residential searches for the first time this year, most likely as a result of a several new products and criteria changes to this sector.

“It was outstanding to discover that we have seen almost 30,000 mortgage criteria changes year to date, which just goes to show the pace at which our industry is making changes.”

Ms Firth said it was “simply not possible” for any broker to remember the 91,000 pieces of criteria, and that even the best help desks would struggle to update the 28,524 changes the industry has already had in 2019.

By Imogen Tew

Source: FT Adviser

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Demand for retail property in London plummets

Demand for retail property in London is approaching lows last seen after the 2008 financial crash, according to new research.

The latest UK Commercial Property Market Survey results published today by the Royal Institute of Chartered Surveyors (RICS) showed that demand for retail property in London fell for the second quarter of the year.

In an indication of the ongoing malaise in the sector, retail was found to be responsible for pulling the overall figure in terms of demand for property down below zero, with a net balance of -61.

The retail property sector also posted the highest rise in terms of availabilities, with 52% of respondents reporting a “significant rise in availability”.

The survey also found demand from overseas investors continued to drop during the quarter as Brexit loomed, with respondents reporting -9% growth. This represented the third quarter in a row where overseas investor demand fell.

However, the RICS report found a rise in demand for industrial buildings – in particular warehouses for ecommerce.

Rents on prime and secondary retail sites are predicted to fall 3.5% and 7% respectively over the next 12 months.

RICS economist Tarrant Parsons said: “The overall picture remains little changed across the UK commercial property market in Q2, with the disparity between a strong backdrop for the industrial sector and weakness in retail still very evident. While expectations continue to point to solid rental and capital value growth in the former, further declines are expected in the latter.

“Brexit uncertainty also remains a notable headwind, causing caution across both occupiers and investors while they await clarity on the UK’s future trading relationship with the EU.”

By Hugh Radojev

Source: Retail Week

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Self-build revolution: The pros and cons of building your own home from scratch

Many of us dream of building our own homes. Yet, while it’s a common aspiration in the UK, we’re far less likely to self-build here than in other countries across Europe.

Self-build accounts for between 7% and 10% of all new housing across the country, around 12,000 homes per year, according to a House of Commons briefing paper. By contrast, that figure is 80% in Austria.

Yet a 2011 survey by the Building Societies Association found that more than half of Britons (53%) would consider self-build if the opportunity was available to them. As such, the government has encouraged self-build in recent years, hoping to boost housing supply.

There are both rewards and risks with self-build houses. What is a dream can soon turn into a nightmare as cost and complexity derail self-build projects. Here are the major pros and cons of self-build:

Pros

Bespoke

Because you’re building your own home (or more likely, paying someone else to do the actual work), you’re involved at every stage of the process.

That means you can tailor the design and finish to all of your specific wants and needs. For example, you can build a super-green home that’s so energy efficient you don’t get any electricity bills. Self-build homes are bespoke, so you can get exactly what you want from a property.

Ideal plot

Often when buying a home you’ll need to compromise on the plot. The building may be what you had in mind, but it’s not in the greatest setting.

But when you’re self-building, you’re buying the land as well. So you can choose a plot that meets your desires, such as overlooking the sea, or in a remote rural location.

Savings

In theory, and often in practice, self-build can be cheaper than buying a ready-made home. The cost of land plus construction can, with research and careful planning, come in lower than the resulting property’s market value.

So not only would it be cheaper than buying a similar property that’s already there, but you could make some money off of the end product, too. What’s more, you can claim back VAT on the construction.

Cons

Risky

There’s always the risk that things go wrong or that you weren’t stringent enough in your planning beforehand.

Budgets can quickly spin out of control as unforeseen problems arise during construction and if you’re relying on a mortgage, the money will usually be released in stages, which can create cash flow problems that delay and disrupt the project.

You need to be sure that you have enough money saved up to see the self-build project through to the end because otherwise you’ll end up living in an empty shell of a property with no utilities.

Another risk is that you might make the property a little too bespoke, meaning it’s so unique that the resale market is small, affecting your chance of reselling the house if you ever wanted to.

Stress

Self-build is not for the faint-hearted. These projects can take months, sometimes even years, before the home is finished. That requires a lot of patience, especially if you’re having to rent in awkward or uncomfortable accommodation while work takes place.

You’ll also need a cool head if things go wrong. Moreover, you need to be an excellent project manager, or hire a good one, which is hard if you’re having to work a full-time job alongside overseeing the construction.

No building project is ever straightforward. In truth, self-build is highly stressful. There’s a lot of money — and your home — at stake. Do you have the mettle for it?

Source: Yahoo Finance UK

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Increase WIFI Connectivity To Improve Rental Yields

Recent research has shown that buy to let investors can improve their rental yields by ensuring that WIFI connectivity in the property is good.

The research from real estate connectivity certifications provider WiredScore and the HomeOwners Alliance has found that two-thirds of residential developers can rent properties with good connectivity services at a higher price and/or with a greater yield.

It was found that 85 per cent of British renters and homeowners still face connectivity issues and failing services, forcing them to use an additional 2.5GB of extra mobile data each month to compensate for their poor WiFi – this additional cost totals £2.2 billion across the nation.

Despite consumers paying an average of £312 for their home internet service, this additional cost is being incurred by users trying to overcome regular connectivity issues and failing services – typically totalling 20 service breakdowns per month. It’s perhaps no surprise that over a quarter of British homeowners and renters (28 per cent) would not have moved into their property if they’d known about the connectivity issues they face.

There are clear commercial benefits of good digital connectivity services:

  • Two-thirds (61 per cent) of residential developers report they can rent their properties at a higher price and/or with a greater yield
  • Two-fifths (40 per cent) see an increased demand for their properties
  • More than half (56 per cent) report they can rent their properties for longer, due to the improved in-home experience

With new developers making the effort to install greater WIFI connectivity in new buildings, the onus is on the buy to let private landlord to ensure that they can compete on an equal level.

President and EMEA MD at WiredScore, William Newton, commented: ‘Connectivity is critical to almost every aspect of our lives – social, leisure and working – with most adult internet users typically spending 24 hours online each week – almost double the time spent in 2007. The residential development community has long shouldered the important responsibility of maintaining and improving residential digital infrastructure in line with a rapid growth in consumer demand.’

Source: Residential Landlord

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Changes in the law means home owners can build bigger extensions without planning permission

The changes will cut out the red tape for many people, making extension building more stress free.

Extending a house can be a costly and time consuming task.

Usually you need to approach your council and get planning permission to build an extension if its bigger than the permitted development rules.

This can often take months and just submitting an application costs money.

But a change in the law means a lot of extensions, within a certain size, will now be able to go up without having to seek the  formal permission.

While this change is big – and gives home owners and developers a lot more freedom, it is not a green light to build whatever you like.

How big can it be?

Under the new rules, single storey extension limits have been doubled to up to 6m for terraced and semi-detached homes, and larger extensions up to 8m long for detached houses.

As well as good news for homeowners, under the new reforms shops will now be able to change office space without the need for a full planning application.

The move builds upon changes to the law which allow business owners to change the use of buildings from takeaways to new homes without undergoing a full planning application, according to the MEN.

To help deliver a greater mix of uses on the high street, the changes also allow the temporary change of use from high street uses such shops, offices, and betting shops to certain community uses such as a library or public hall.

Can I just go ahead?

The short answer to this is no.

You do still need to involve your local planning department.

Since 2014, over 100,000 homeowners have taken advantage of the temporary rules which have not only doubled, but don’t require planning permission from local authorities.

Instead of waiting months for approval, homeowners now notify their local council of the building work beforehand, who in turn then inform the neighbours to the property.

However if neighbours raise objections, the council then decides if the extension is likely to harm the character or enjoyment of the area.

Why has this change been imposed now

Kit Malthouse, the housing minister, says these changes have been made so people are not forced to move to bigger properties.

He said: “These measures will help families extend their properties without battling through time-consuming red tape. By making this permitted development right permanent, it will mean families can grow without being forced to move.

“This is part of a package of reforms to build more, better, faster and make the housing market work – and sits alongside our drive to deliver 300,000 homes a year by the mid 2020s.”

By Saffron Otter

Source: Kent Live

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Research reveals small and large UK property owners’ biggest concerns

Owning a property is an essential aspect for every individual. Wait, are we discussing purchasing a house in the UK? Of course, yes. Affordability of housing merely affects an individual’s condition- both mentally and physically. Did you know, 2/3rd of the UK residents are still living in the rented sector? Well, the reason is pretty visible- due to unaffordability factors in the locality, and the cost of the property. Well, location is another major concern for the majority of residents in the country.

Research says, nearly 12,000 tenants have chosen to live in the rented sector by their own choice and not due to the prices of houses. How about the rest? The remaining group of individuals has no options left but to live as a tenant. The current rent or tenant statistics is 5 million, and it is expected to be 5.80 million households in the next two years. Of course, the tenants would be elderly, retirees and the youngsters of the country. What are the reasons for rising prices in the real estate market?

Reasons for unaffordable growth in the housing sector

Well, here are some of the significant concerns that we need to look upon, and make it affordable for every individual though. Mentioned below are some massive factors:

  • The higher cost of living
  • The absence of rent control measures
  • Increase in Private Landlords
  • Too much of the wealth gap in the country
  • Non-diagnosing of the root causes from media and government

How can we make it affordable?

Well, this cannot be a single person’s thought or action. This needs many hands and brains to work upon and raise the concerns. The reasons are already known to most of us. Not only buying houses have become expensive, but even the roof repairs and maintenance also have been costly. Well, research says that owning a property in the United Kingdom is the most luxurious asset. To prevent the rise in prices, we can act upon some specific policies:

  • Why not free up those local authorities to invest or purchase in a new property?
  • Private landlords and their pricing modules need to be monitored and manage with necessary regulations.
  • Land and property taxations need to be reformed once again.
  • Land Hoarding can be replaced with Development in the sector.

However, acting upon being a single individual is nearly impossible. Did you know many of the individuals have started moving to other places leaving London altogether? Most of them are young buds. Approximately 7,000 people are homeless and are spending their cold nights on the busy streets. Not just the UK, many countries need to reform their real estate sector and housing policies. This will undoubtedly make the living of every individual better and improved. Well, as mentioned already some of the tenants have entered the rental sector with their own choice, may be due to their work, or other factors, but the majority of them have chosen to be a rented citizen due to their unaffordability.

Inevitably, the private rented sector will grow to enhance in the tenant demands, but is this working well for the whole industry? Don’t you think there’s a need to act upon these issues?

Source: London Loves Business

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Investors grab Brexit bargains among UK housebuilders

Daring investors are dipping their toes back into UK housebuilders, attracted by high dividend yields and low valuations even though they are seen as among the most vulnerable sectors in the event of a messy Brexit.

As Britain’s exit from the EU remains shrouded in fog, housebuilders have been top targets for short sellers betting on a fall in the shares, but recent data shows short positions have fallen and some investors are buying back in.

To those investors, Brexit fears and the perceived risk to housebuilders also give the potential for strong rallies. Indeed, British housebuilder stocks have risen 11 percent since their December low and Taylor Wimpey has shot up 30 percent since then.

“I like it when there’s a short. You can have good returns when there are disagreements,” said Fabrice Theveneau, head of global equities at Lyxor Asset Management in Paris, who has recently bought shares in some UK housebuilders.

“The guys who’ve been shorting the housebuilders made a lot of money on them… they could very quickly turn their positions.”

In the last thirty days, the level of short interest has fallen for most UK housebuilders, data from FIS Astec Analytics shows.

Shares in the UK’s biggest listed housebuilders fell between 26 and 33 percent in 2018 as housing data increasingly showed a severe slowdown in sales volumes and prices, blamed in part on the uncertainty surrounding jobs and growth after Brexit.

British property surveyors are the most downbeat about the short-term outlook for house prices in nearly eight years, a survey on Thursday showed, as buyers and sellers shy away from major financial decisions.

London and the South-East have led the slide in house prices and sales. Yet a Deloitte survey found construction in four regional cities is booming.

Investors are using that regional divide to guide their choices.

“We try to avoid those mostly focused on London, like Berkeley. We prefer Taylor Wimpey, Persimmon, and Barratt Developments,” said Lyxor’s Theveneau.

TARGETED STRATEGY

Data from FIS Astec Analytics shows short sellers are even differentiating between London-focused builders Berkeley and Crest Nicholson.

Crest Nicholson has seen short interest increase significantly, with a utilisation rate (percentage of total shares borrowed) as high as 32 percent.

Last year, Crest Nicholson pulled back from London, closing its office there in a bid to reduce its dependence on the UK capital’s faltering housing market where prices were falling and costs were rising.

“We have faced some challenges in London and with sales at higher price points where political and economic uncertainty has adversely impacted customer demand… this is likely to continue pending Brexit resolution,” it said in January.

The company which focuses on the south of England has moved into the Midlands in a push into more affordable areas, and has postponed opening its new South East division.

Rival Berkeley Group, which also has significant exposure to London, has meanwhile seen short interest fall since the Brexit vote.

Charlie Campbell, an analyst at Liberum, put this down to the housebuilder’s more international customer base which could insulate it from falling confidence among UK buyers.

Berkeley Group has sales offices in Dubai, Bangkok, Singapore, Hong Kong, Beijing and Shanghai.

Another strategy followed by some investors is to home in on stocks that could show more resilience in the face of slower sales and low buyer confidence.

Paul Mumford, fund manager at Cavendish Asset Management, owns Telford Homes because of its focus on building in non-prime, “up and coming” areas of London, and its policy of forward selling developments.

Mumford also owns Henry Boot, Daejan, and St Modwen, which he says are more insulated from the cyclicality of the housing market because they are more exposed to the commercial property market.

OVER-OPTIMISTIC?

How much of the hard Brexit scenario is discounted in housebuilder shares is key to investors seeking to find value.

Redburn analysts say current valuations factor in a roughly 30 percent decline in EBIT (earnings before interest and tax) this year, which would imply a 5 percent fall in house prices and 10 percent fall in volumes. The analysts have no sell recommendations in the sector.

That is a far more benign scenario than the 35 percent fall in house prices over the next three years predicted by Bank of England governor Mark Carney if the UK exits without a deal.

There is no date yet set for a new vote on May’s Brexit deal, but share prices have been climbing despite the lack of any clarity.

“The big question is not what happens today but where are we in the middle of summer, is all this behind us?” said Liberum’s Campbell.

“If it is, then the shares are pretty cheap, but if we’ve just gone through a disorderly Brexit you could look back at the shares and at this point in time you might think we were all a bit over-optimistic.”

Source: UK Reuters

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‘It’s happening again’: UK property funds adjust pricing ahead of Brexit

Asset managers are reportedly getting tetchy about scrutiny of the Investment Association UK Direct Property sector in the lead up to Brexit despite the fact they argue they are better placed to deal with redemptions than summer 2016, when the UK voted to leave the European Union.

In December, the sector faced £315.6m outflows – the worst redemptions since July 2016, when a raft of funds gated due to a mass exodus of client money.

The Threadneedle UK Property Authorised Investment and Kames Property Income funds both switched to bid pricing in December, essentially wiping out returns for the year for investors exiting the funds. However, the funds attracted £10.8m and £2.6m respectively in a month where all other funds, bar MGTS St Johns High Income Property, faced outflows ranging all the way up to £92.6m for the Janus Henderson UK Property Paif.

Portfolio Adviser understands concerns have been raised in the industry that media coverage of liquidity positions could trigger a run on funds, despite the fact funds are raising cash levels and the market is more liquid than 2016.

The Financial Conduct Authority made headlines this month when it was revealed the regulator is monitoring property funds daily for liquidity.

UK property fund returns since Brexit

Fund Performance
Scottish Widows HIFML UK Property 28.85%
TIME Investments Freehold Income Authorised 25.94%
Janus Henderson UK Property PAIF 17.25%
L&G UK Property 15.28%
Sector: IA UK Direct Property 13.68%
TIME Investments Commercial Freehold 13.47%
Kames Property Income 12.93%
Royal London Property Inc 10.82%
BMO UK Property 2 Inc 10.72%
MGTS St Johns High Income Property 10.47%
Standard Life Investments UK Real Estate 9.89%
Aberdeen UK Property 8.85%
M&G Property Portfolio 8.15%
Threadneedle UK Property Authorised Investment 7.99%
Aviva Inv UK Property 7.30%
Source: FE Analytics for period between 24 June 2016 to 12 February 2019

‘It’s happening again’

In early July 2016, less than two weeks after the Brexit referendum, Standard Life, Aviva Investors and M&G gated funds followed shortly after by Columbia Threadneedle and Janus Henderson. Investors pulled £5.7bn from the sector in the period from January to July 2016, according to Morningstar Direct.

“It’s starting to happen again,” says Morningstar director for manager research ratings Jonathan Miller about December outflows and pricing adjustments. He attributes recent adjusted pricing at Kames and Threadneedle to outflows and “presumably a feeling that their rainy-day cash, part of keeping their powder dry to meet redemptions, wouldn’t suffice”.

Brexit uncertainty is largely cited as the driving force behind investors pulling money although other factors have compounded outflows. “Property managed a respectable 7.5% total return over the year so it seemed the investment community did trim quite aggressively,” says Architas investment manager Jen Causton.

She expects funds in the sector would have to gate if there is a no deal Brexit.

Chelsea Financial Services managing director Darius McDermott points to a slowing UK economy as a poor environment. “When the UK is slowing down, commercial property is not a go-to asset class. It’s quite correlated to the economy.” UK GDP growth slowed to 0.2% in Q4 2018 and the economy contracted in December, the Office for National Statistics this week revealed.

Total assets in the sector have shrunk from £14.0bn in May 2016, in the midst of outflows but ahead of the Brexit vote, to £11.9bn in December 2018, the last date for which Morningstar Direct has data.

UK Direct Property funds – AUM pre-Brexit vote versus now

Fund May 2016 December 2018
M&G Property Portfolio £4.8bn £3.7bn
L&G UK Property £2.5bn £3.3bn
Aviva Investors UK Property £815.0m
Janus Henderson UK Pty PAIF £1.6bn £2.8bn
BMO UK Property £305.0m £554.4m
Scottish Widows HIFML UK Property £479.1m £446.3m
SLI UK Real Estate Platform £608.0m £438.0m
Royal London Property £399.5m £408.4m
Aberdeen UK Property £625.5m £427.6m
Kames Property Income £203.4m £315.1m
Threadneedle UK Prpty Authrsd Invmt £270.9m £304.1m
TIME Freehold Inc Authorised £289.8m
MGTS St Johns High Income Property £38.9m £111.9m
VT Redlands Prpty £96.4m
Source: Morningstar Direct

Adjusted pricing wipes out returns

Architas holds L&G UK Property or Kames Property Income funds in its multi-manager range and a handful of investment trusts for more specialist exposure, like doctor surgeries and ecommerce.

“One of the funds we invest in moved to a bid price and it effectively wiped out last year’s returns,” says Causton. “You crystallise that if you come out of the fund. It does affect the performance quite a lot, particularly when returns are quite hard to come by.”

Kames and Threadneedle were the worst performers in 2018 falling 2.6%, the only funds with negative performance, compared to 3.9% gains in the IA UK Direct Property sector. In the period from 24 June 2016 to the end of November 2018, before the price adjustment took place the Kames fund returned 19% and Threadneedle delivered 15.1%, both outperforming the sector return of 13.5%.

Chase de Vere favours open-ended funds for its bespoke portfolios and discretionary models. Bid pricing is part and parcel of investing in the sector, says research manager Justine Fearns. “If you can time it right, or get lucky, then all good and well but if you are investing for the longer term then ultimately it should be the investment case that is the driver of purchases and redemptions, although there could be other considerations to take into account.”

IA UK Direct Property returns in 2018

Fund Performance
TIME Investments Freehold Income Authorised 8.07%
Scottish Widows HIFML UK Property 7.84%
TIME Investments Social Freehold 5.21%
TIME Investments Commercial Freehold 5.00%
L&G UK Property 4.65%
Standard Life Investments UK Real Estate Platform 4.57%
Aberdeen UK Property 4.36%
M&G Property Portfolio 4.17%
Janus Henderson UK Property PAIF 4.10%
Sector: IA UK Direct Property 3.91%
BMO UK Property 3.66%
Aviva Inv UK Property 3.65%
Royal London Property 3.40%
MGTS St Johns High Income Property 3.37%
LF Canlife UK Property ACS 3.30%
VT Redlands Property Portfolio 1.94%
Kames Property Income -2.57%
Threadneedle UK Property Authorised Investment INI GBP TR in GB -2.57%
Source: FE Analytics

Cash allocations march upwards

Kames Property Income fund co-manager Richard Peacock tells Portfolio Adviser two sales due to complete this week are due to take liquidity from 17.3% to 19%.

“Given the market outlook we are targeting a liquidity position of around 25%. With return prospects slowing, holding an elevated cash position will have less of a dilutive impact on fund performance,” Peacock says. The fund has had bid pricing in five of the 59 months since launch, he adds. “By comparison, the majority of the peer group swung to bid price in 2016 due to outflows and have remained on that pricing basis ever since due to continued outflows.” Kames introduced a 10% pricing adjustment to the fund following the Brexit vote.

Threadneedle holds 12.3% in cash “the upper end of its liquidity corridor”. “Whilst this plays an important role in the context of meeting potential redemptions, as markets stabilise it can provide a valuable buying opportunity as well,” a spokesperson says.

The M&G Property Portfolio is holding cash above its 7.5% to 12.5% range at 15%, which it describes as a prudent measure to manage any client flows during uncertain market conditions.

It has been reducing retail assets in a similar move to Janus Henderson. Ainslie McLennan, co-manager of the Janus Henderson UK Property Paif, says: “Our long held view has been that the retail sector, particularly traditional retailers and high street assets, would come under pressure.” Instead they are seeking an “appropriate, diversified mix of assets we believe to be best suited to the conditions ahead”, McLennan says.

Fearns lists L&G UK Property as her fund pick for the sector. The team has been engaging with clients regularly to help its liquidity management and it was one of the few funds that did not gate in the aftermath of the referendum, she says. Chase de Vere prefers property funds to hold cash over property securities for liquidity due to it being the more stable and liquid asset class, she says.

LGIM did not wish to comment when contacted by Portfolio Adviser but it has the highest cash allocation in the sector at 25.5%, according to FE Analytics. It made a 15% ‘fair value adjustment’ to L&G UK Property in the aftermath of the EU referendum.

In contrast, Royal London Property holds 8%. Head of property Gareth Dickinson highlights that the fund, which requires a £100,000 minimum investment, consists of a” relatively small number of institutional investors” and redemption requests require three months’ notice, which influences the shareholder base. The fund has not adjusted pricing since the Brexit referendum.

More liquid market

While redemptions are picking up, asset managers say the UK property market is more liquid than the lead up to the Brexit referendum.

“It is difficult to make a simple comparison between the two periods and the impact on liquidity management,” says Peacock, who describes the referendum as a binary risk event whereas recent outflows have been spread over several months.

He adds: “The levels of sales completed by the peer group already is encouraging and demonstrates that we still have a liquid market for those investors looking to sell which is a contrast to Q3 2016 when transaction volumes fell and liquidity dried up for many funds.”

Outflows may actually benefit the sector, according to Willis Owen head of personal Adrian Lowcock. “All that hot money is now out; all that shorter-term money is now out. What you’ve got left should be longer-term investors.”

However, outflows leave funds in the position of having to sell assets to increase cash positions, Lowcock says. Willis Owen currently favours passives for property exposure, such as the iShares Global Property Secs Equity Index and L&G Global Real Estate Dividend Index.

Investment trust versus open-ended debate rings on

Morningstar’s Miller says pricing adjustments highlight “what can happen overnight given the illiquidity in the space”. “We believe there’s a mismatch in having daily dealing for bricks and mortar property funds, given the illiquidity profile.”

McDermott says he currently only holds property via specialist investment trusts, but despite the swings that can occur when property funds adjust pricing, he warns investment trust volatility can be higher.

He says investors can only be penalised to the extent of the property fund’s spread, which is “typically 5%, sometimes 5.5%”. “Investment trust discounts can go much wider than that. After the Brexit vote when all the property sector was under stress, some of the investment trusts were trading at 20 or 30% discounts. You could get your money back but you were getting it back at 30%,” he says.

Association of Investment Companies data shows the Schroder Real Estate Investment trust discount was 19.7% on 30 June 2016 compared to a 1.6% premium three months earlier. It was trading at a discount of 16.3% at the end of December 2018. The UK Commercial Property Reit was the next highest discount at the time of the Brexit vote at 17.1%. It now trades at a 10.9% discount.

Source: Portfolio Adviser