June 4, 2021
Investment would be easy if circumstances never changed. If an asset that brings reliable returns one day continues to do so forever, life would be simple – although fund managers would be out of a job. But things do change, and investors need to be able to respond to that, realigning their assets to reflect real circumstances.
A low-yield environment like the one we are in, pushes investors to consider alternative assets, such as direct real estate investment. These are the kinds of assets that offer attractive relative returns, but because of their illiquidity, it is very difficult to rebalance a portfolio of these assets when the need arises. Investors are locked in – to their disadvantage.
The news of Aviva closing its open-ended property fund is yet another reminder of this. Suspended last year because of uncertain asset values, the fund doesn’t have the liquidity to resume normal trading and meet expected demand from investors who want to redeem their shares. Those investors who would want to divest can’t, and now they have to wait for the fund’s closure on 19 July.
Aviva’s decision shouldn’t come as a surprise, because funds like that suffer from a fundamental liquidity mismatch. Their chunky assets are difficult to buy and sell quickly enough, forcing them into a corner when problems arise. The result is that fund managers cannot guarantee daily trading, and in times of crises they’ve been forced into fire sales to free up cash. Meanwhile, investors find themselves holding assets that are sold at a discount or stuck in funds that no longer meet their needs.
What happened to Aviva’s property fund is bound to happen again to other open-ended retail funds. The real estate industry knows the model isn’t good enough and, for years, we’ve needed a solution that fixes this issue with liquidity. The Financial Conduct Authority and the Bank of England review of open-ended funds published in March 21, was welcomed by the Financial Policy Committee which had deep concerns over funds overestimating their liquidity.
IPSX is now that solution. Mailbox REIT plc, our first admission, made history on 14 May as the first security based on a single real estate asset to start trading on a regulated exchange created exclusively for property. An office-led building in Birmingham, the Mailbox is anchored by the BBC – a strong, government-backed lease – with complementary retail and leisure. Rather than betting on funds that have historically left investors with few choices, investors can now buy and sell shares in this building as a direct, liquid real estate investment. In the first week of trading, we have seen a small premium to the issue price, against the backdrop of wider global markets volatility and steep falls in Bitcoin values. WH Ireland and Peel Hunt are acting as market makers, with others expected to join them in due course.
In short, IPSX gives investors freedom. If they wish to hold shares in a particular building for a long time, they can, and if they wish to sell those shares at any point, they can. There is never a risk of being locked in. Moreover, IPSX ensures that the choice to buy, hold or sell will be based on unrivalled transparency.
For the first time, Income Analytics reports are available on all issuers, giving a bond-like rating as well as an overview of the tenants that are paying rent. An investor interested in the Mailbox REIT plc, for example, has all the information they need available to them. The report gives investors clarity around the income streams of each asset trading on the exchange. This transparency enables investors to make better informed, data-driven decisions and will become a vital part of redefining how real estate is transacted in the future.
In this way, IPSX combines the liquidity of the public market with the return profile of the private market. Working with its Trading Members, IPSX provides access to the sector and solves the liquidity issue through an FCA-regulated exchange.
Some investors relish the illiquidity of real estate. Some of them say: “I don’t want publicly traded real estate because I’m happy to not feel the need to mark to market.” The lack of daily pricing means it might appear that their asset is stable. But just because it appears stable doesn’t mean it is.
Investors cannot bury their heads in the sand with traditionally illiquid assets. One day they might realise their safe, reliable portfolio has missed out on a boom in a particular real estate sector. But the reality is that the trends that drive the growth of certain assets – whether they are offices or shops or warehouses – don’t happen overnight. If investors have access to greater liquidity, they can hop on the train before it leaves the station.
At times, holding an asset for years will be the right strategy for certain investors. Taking the long view can absolutely be a reasonable investment decision, but that decision should be just that: a decision. For years, the products available to the market have forced the choice on investors, but that’s no longer the case.
IPSX provides the opportunity to counter the risks that arise from illiquidity. Real estate investors can now proactively manage and rebalance their portfolios. They no longer have to make a choice between real estate or liquidity. They can have both.