Just a few days ago we discussed the issues facing the UK property fund market which was beset by a number of suspensions in light of the surprise Brexit vote last year. In effect the suspensions, brought on by a lack of liquidity, stopped investors from redeeming their units until the fund managers were able to clarify new asset values and increase liquid assets. So, is liquidity a problem for small real estate investors?
Property funds offer spread of investments
While it would be wrong to suggest that the majority of investment in the UK property fund market is private client money, this type of investment vehicle has been popular among smaller investors. Institutional investors dominate these funds as it allows them to get a spread of investments in a relatively short period of time. In theory, they are still able to redeem their units as any private investor can but because their average investment sizes is significantly greater they tend to be long-term investors.
If you are a relatively small real estate investor, say with around £100,000 to invest, it is very difficult to get a spread of investments. If you bought one property you would likely pay in excess of £100,000, therefore additional finance would be required, but it is possible to for example acquire £10,000 tranches in 10 different property funds. If this was done correctly, this could give you exposure across a whole range of different markets thereby reducing specific property asset risk.
Property funds have always been illiquid
The vast majority of property funds are not even listed on the stock market, or have a liquid secondary market, because they are marketed as long-term investments. Even though property funds do hold cash on deposit and other near cash assets the vast majority of their funding is invested directly into the property market. In traditional markets the cash balance would be used to redeem units which would then be resold to new investors. However, when the buyers dry up and the sellers turn up in great numbers this is when liquidity can become an issue.
At the end of the day, a property fund can only be as liquid as the assets in which it invests. Property assets are predominantly long-term investments as it can take some time to complete transactions. So, while there may have been a short-term liquidity problem in light of the Brexit vote the authorities may be in danger of “throwing the baby out with the bathwater”.
Whether you invest directly in property or via the array of property funds now available around the world, property is a relatively illiquid asset. There will be buyers and sellers at any one time but matching prices, completing transactions and receiving settlement proceeds does not happen overnight. The authorities are right to look into liquidity issues in light of the Brexit vote and the suspension of redemptions by many property funds, but is there really a solution?
As long as private client investors are fully aware of the risks of investing in property funds, and the underlying illiquidity of property assets, what more can fund managers do?