With the recent gating (regulators shutting the fund down) of open ended real estate fund M&G on Wednesday in the UK, it makes one ponder how these mass market open ended funds ever came about, and also the current outlook for Prime Central London real estate. Real estate fund M&G’s assets under management plunged by 27.9% in the year from £3.5Bn to £2.5Bn by 31October. Other open ended funds at risk of also being gated are Columbia Threadneedle and Kames Capital.
Logically, real estate has been a traditional illiquid asset class compared to stocks, ETF’s and other mass market investments. The fallacy with these open ended real estate funds in the UK is that investors can liquidate their positions more rapidly than the fund can liquidate its current real estate positions, creating the current dilemma. In effect a liquidity crisis similar to last century’s Panics and runs on the banks.
The tipping point for this investor panic is the pending UK election on Thursday, 12December. Investors are concerned that if Labour wins, Jeremy Corbyn will implement his far left socialist agenda, causing the UK property market to fall if not crash. Similar to stock price susceptibility to news, concerns about this critical election has led to this current liquidity crisis with these open ended UK real estate funds. Ironically, the Conservatives are favored to win the election, potentially making the cause for Panic unfounded.
It therefore makes much more sense to invest in property at the High Net Worth Family Office and Institutional level via a Private Equity Fund Structure. This is done via private placements, typically for a three to five year time frame. Although an investor’s capital is illiquid for the 3-5 year duration, the returns are typically much higher than market using sophisticated strategies like joint ventures with top local experts to acquire off market or distressed property for a discount. Value can be added by refurbishment and improving a property; improvement of business and operations for commercial property, or restacking of the commercial leases. These strategies take time to implement, and hence the 3-5 years average time frame to hold private equity real estate investments.
Knightsbridge Ventures is currently opportunistic in Prime Central London (PCL) real estate, in the mid market. With Brexit uncertainty since 2016, most property development and investment on a large scale has been sluggish causing pent up demand for residential inventory as demand still exceeds supply. Banks have also been tight with lending since the Brexit Referendum on development projects, creating opportunity for private equity. Lastly, the middle sized property market in PCL provides optimal investment returns due to less competition. Local property developers aren’t able to fund the mid sized deals (£25mm or greater), and the large institutional level investors are focused on larger deals greater than £100mm.
Patrick Swint, MS, MBA. www.KnightsbridgeVentures.com
Here are a few articles referencing this weeks gating of these open ended real estate funds and the Central London property market: https://www.investmentweek.co.uk/analysis/4007836/contagion-risk-cards-property-funds-following-suspension-experts-warn