At least the listed sector gives valuation clarity

April 1, 2020

Over the last few weeks, we’ve witnessed what sounds like a familiar story: uncertainty hits investors and open-ended property funds are forced to suspend trading. By 18 March, there was more than £5bn locked away in these funds. Thinking back to the weeks after the EU Referendum in 2016, this might feel like déjà vu, but it isn’t. This time, there’s a difference – and a sign that property needs platforms with greater transparency and certainty around valuations.

Previous suspensions, like the ones in 2016 or 2008, were based on illiquidity. Panicked investors scrambled to take their money out of retail funds, and managers were forced to halt trading because they did not have the cash to match the flood of redemptions.

Compare that to what Gerry Frewin, fund manager for Threadneedle UK Property Authorised Investment Fund, said following recent suspensions: “While we appreciate this may cause some inconvenience, our decision to suspend dealing will prevent any investors being disadvantaged as a result of those redeeming from the fund or investing new money into the fund at an inaccurate price.”

Because of heightened uncertainty and volatility, fund managers simply don’t know what their assets are worth. In line with FCA rules on the valuation of illiquid assets in open-ended funds, therefore, they stopped trading.

REIT level of transparency

It’s worth considering the stock market in light of this, as well. We know the stock market has had an exceptionally rough month, but there is an upside. A particular REIT might be down 30% over two weeks, but at least know its market value.

Although there have been losses across the board, listed propcos with long secure income, such as Primary Health Properties and Assura, have performed significantly better than some of the more diversified REITs. Again, transparency and certainty play a crucial role. Investors will have more faith in the strength of long leases with covenants backed by the government. REITs that specialise in those have the most to gain, in contrast to large, diversified portfolios, which have income streams of varying – and potentially unclear – quality.

A pathway for improvement?

The question is: can we make the market value of property assets even clearer to investors? We believe we can. When an individual asset is listed on IPSX investors will have the best possible understanding of the income it generates. A building might have a mix of short and long leases with occupiers ranging from multinational corporates to independent retailers. Not every lease will necessarily be secure, but the point is you have that information at your fingertips and can form your own view.

Values will inevitably rise and fall in times of heightened volatility, and that’s often out of our control, whether we are fund managers, heads of listed firms or investors. The challenge is to meet that volatility with as much clarity on asset values as possible. It won’t solve a macro crisis, but it will give investors the best possible opportunity to make wise, informed decisions.

As we all continue to navigate these extraordinary times, clarity is more valuable than ever – let’s not forget that when a sense of normality returns.

Roger Clarke

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