New Model Adviser | Is this the end of retail interest in commercial property?

Aegon’s continuing struggle to reopen its property income fund 15 months after its suspension underscores an existential threat for our industry: as far as the average investor is concerned, commercial property risks becoming un-investable. As the fund builds up its cash reserves we’re forced to ask, are we seeing the end of retail interest in commercial property?

This would be a terrible thing. We repeat this often, but it’s worth remembering that UK real estate is a near £1tn sector that offers consistent returns and strong, stable dividend yield growth. Its defensive qualities make it particularly attractive and reliable in a low-yield environment which makes government bonds a zero return asset (or worse, negative, if the yield curve continues to steepen from current levels). Institutions have been able to tap into those advantages, but the reality is different for the man and woman on the street.

Direct commercial real estate investment has been largely out of reach for most retail investors. Their few options for exposure to the industry include open-ended retail funds. However, several of these funds have been suspended for more than a year – the M&G Property Portfolio recently resumed trading after 17 months, while the Aviva Property Fund is staying shut until it permanently winds up in July – and the regulatory response is threatening their existence.

Establishing a 180 day notice period for redemptions – which the FCA is considering as a way of reducing the risks posed by the funds’ liquidity mismatch – would spell the end of these funds because it would likely make them ineligible for ISAs.

As the recently published feedback on the FCA’s consultation shows, the fund management industry is lobbying for an exemption to be made. Respondents noted that 30-40% of investments in these property funds are through stocks and shares ISAs, and the loss of tax status would “cause investors to turn to other products”. But the FCA’s hands are tied. In its response, the regulator simply said that it’s working with the Treasury and HMRC on the issue to establish whether current investors could continue to benefit from ISA eligibility. In other words, the future of these funds is shaky at best.

What we’re witnessing is a lack of access. The fact is this problem is driving leading players in the space (such as Aviva) to withdraw from the industry, thereby closing off retail access to commercial real estate.

But investors should have access and they should have choice. We need to ensure that commercial property remains investable, which is one of the driving motivations for IPSX, the new regulated stock exchange for single property assets.

Investors on the exchange can trade the shares of the operating companies which own single commercial real estate assets in the same way they can the shares of HSBC or Vodafone on the another exchange. Crucially, IPSX gives investors access to detailed income analytics reports and a bond-like rating to assess the strength of their investments. This means property investment can finally be truly transparent and accessible to the average person.

Our first admission – the Mailbox REIT plc which owns the Mailbox building in Birmingham – is now live and trading at a small premium to the issue price giving a yield of nearly 7%. There are more on the horizon. By creating a regulated exchange for single property assets, IPSX has opened a route into commercial property for retail investors just as another route is closing.

For more information about IPSX, the Property Stock Exchange, please get in touch with us at media@ipsx.com or by calling us on 0203 931 8800.