This article originally appeared on Costar, written by Paul Norman, on Friday 22nd March 2019.
IPSX, the International Property Securities Exchange which is set to pioneer trading in individual real estate assets on the public markets, has begun talks with the UK’s open-ended real estate funds about how the exchange can help reduce their exposure to a run of redemptions such as happened in the wake of the EU referendum vote in 2016.
IPSX, which is backed by a number of leading real estate groups including British Land, Henley Investments and M7 Real Estate, and received FCA recognition in January, has confirmed it is now in discussions with early potential issuers and that the first IPOs may come as early as the end of the second quarter of this year, subject to market conditions as a result of the Brexit discussions.
While the specific assets are yet to be announced IPSX has begun talks with UK Property Authorised Investment Funds (PAIFs) about how the exchange launch may be perfectly timed to help reduce exposure to redemptions.
The structural problem for open-ended real estate funds has always been the illiquid nature of real estate given the timescales of the traditional private market sale process. By offering investors access to real estate via public markets trading IPSX Group Chairman Anthony Gahan says it offers a “deeply relevant” solution.
Gahan said IPSX has been talking to PAIFs about the opportunity.
“There has been sustained interest from the FCA and Bank of England over a long period in open ended funds. As a result they are holding more cash than previously and have been looking at different pricing mechanisms for redemptions. The real problem is that when people decide to redeem in significant numbers it reduces the value for those that stay in the fund if assets have to be sold at a significant discount. The discussions we are having are designed to help eliminate this problem.”
Gahan says that Property Authorised Investment Funds (PAIFs), the tax efficient, UK regulated property fund vehicles, which provide investors with an open-ended alternative to listed UK REITs and other fund vehicles, can benefit because they are able to invest in REITs which most of IPSX’s issuers would be.
“Imagine a situation where one of the PAIF’s assets was an IPO on IPSX. The PAIF would need to sell down at least 25% generating cash but would retain 75% of the economic interest in the asset still generating the same yield in their portfolio.”
Gahan said going forward the PAIF would then be able to sell down further shares as and when required to cover redemptions.
There is also the ability to prepare assets to be ready to go quickly to IPO as and when required.
There have been gathering suggestions that open ended funds will again look to increase liquidity as the Brexit deadline looms in recent weeks.
The funds have been the focus of Bank of England and FCA scrutiny for some time. The FCA has been sourcing the views of more than 60 firms in recent months to assess the impact of the two major strategies which emerged following the initial Brexit vote: fund suspensions and pricing adjustments to contain asset fire-sales.
Adopting the former strategy, Standard Life Investments, M&G Real Estate and Aviva Investors were first to close their funds after the Brexit vote, followed by Henderson’s UK Property fund, Columbia Threadneedle’s UK Property fund and three Canada Life funds.
Each cited high redemption requests and the need to protect remaining investors’ interests and uncertainty around the pricing of commercial property assets. Many of the big UK open-ended funds reported unsolicited approaches from opportunistic funds and hedge funds trying to capitalise on the market stress to buy otherwise stabilised properties at a discount.
In contrast, Aberdeen Asset Managers, Legal & General Property, BGO Global Asset Management and Kames Capital opted for the second strategy - to dissuade redemptions through valuation write-downs. They respectively imposed fund price write-downs of 17, 15, 11 and 10%, respectively.
Within two weeks of the Brexit vote, open-ended funds managing more than £21bn in UK commercial real estate assets, or more than 1,000 individual properties, were closed to redemptions or heavily guarded, squeezing liquidity.