22Jul 2016

Martin Gilbert


UK real estate reality check

UK real estate reality check

Concerns about what Brexit might mean for the price of commercial property led to a rush of investor uncertainty, naturally leading many to pull their money from managed real estate assets.

Many investors had been reducing their exposure to property because of a good run of performance. But when the European Union (EU) referendum vote was announced, we quickly started to hear hyperbolic talk of an implosion in banking and financial services in London.

This then quickly fed through to predictions about the central London office market and the UK’s broader property market. Sentiment had changed, and suddenly there was only one way the market was going: straight to the exit.

We were well prepared ahead of the vote, mostly because we believed that a proportion of cash up to 25% should be kept in order to meet possible redemptions. We understood that while this percentage was high, it could come in handy for moments like this.

We also understood that investors would want liquidity. But the question was, at what price?

One way to access liquidity is by selling property to restore cash levels. Selling property quickly has relatively penal consequences. We liken it to selling a house. If the owner wants a quick sale, which compresses the sales process (an estate agent marketing the property, a buyer employing a surveyor and the legal paperwork), then a discount to the market value is inevitable.

Commercial property is more liquid than residential property. In order to sell commercial property, organization is key: have a good buyer, a good lawyer and all the ducks lined up beforehand. A moving van may not even be needed because the tenant will be there for some period of time after the sale. The flipside of liquidity is that you may not like the price you can get for accessing it.

During these types of stress events, managers should focus on treating all customers fairly throughout the decision-making process. After all, investors collectively own all the managed assets. But striking a balance is critical. In property, it can be very difficult to sell the best or most liquid assets because it can leave the remaining investors with a worse quality portfolio.

The good news is that there are mechanisms in place to ensure that managers do the absolute best that they can to deliver daily liquidity from an asset class that is viewed as relatively illiquid, such as property.

In time, the property market will find its level. The fundamentals of property have not changed, and we do not believe that the market is about to collapse. The backdrop is very different today from what it was in 2008.

People invest in property to diversify their investments and access relatively reliable income streams. These features are unlikely to evaporate overnight.

As with most things, there is a tendency to overestimate the short-term impact of change and underestimate the long-term impact. That creates opportunities and challenges in the short term. For those with their eyes on the long term, we believe UK property can be an attractive asset in investors’ portfolios. Now that the UK has a new prime minister in place, it must be the role of government and business to help ensure stability and calm. We leave that to Theresa May and her team.

Important Information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Investments in property may carry additional risk of loss due to the nature and volatility of the underlying investments. Real estate investments are relatively illiquid and the ability to vary investments in response to changes in economic and other conditions is limited.

Diversification does not ensure a profit or protect against a loss in a declining market.

A version of this article originally appeared in The Daily Telegraph on July 15, 2016.

Image credit: IR Stone / Shutterstock.com

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