Testing times for UK property funds

Property fund management in the UK is going through its most testing period ever as the real estate market continues to slump, making it perhaps surprising that the largest asset managers are preparing for a fresh push into the still troubled sector.

Managers predict the emergence of opportunities to buy properties cheaply, and have been building up property teams even as others are cutting staff in the real estate market.

Funds are sometimes derided as too slow for the entrepreneurial property market – buying at the top and selling at the bottom, suggest the detractors – but this time it seems they want to join the party early.

Last month, F&C finalised the acquisition of Reit Asset Management, a well-known and nimble property investor, following more than a year of negotiations. It comes after Aberdeen Asset Management in May bought back its former UK property management arm from Australia’s Goodman.

Other asset managers are also gearing up for the recovery, including the UK’s largest, Aviva, while private equity groups have also been busy fund raising.

Around $30.8bn (£19bn, €24bn) was raised in aggregate by 32 private equity real estate funds that reached a final close in the third quarter, according to Preqin, with 378 real estate funds now on the road aiming to raise $243bn.

Lucia Ferreira, of recruitment consultant Russell Reynolds, reports that the fund and asset management sectors are the only areas recruiting in the property industry.

Leo Noé, chairman of F&C Reit Asset Management, says this has been the worst property recession in his 30 years in the industry, but that it would lead to opportunities.

Commercial property assets have lost around a quarter of their value since the downturn began last summer, and what little property being traded is already generally below the long-term average price.

“This is worse than the 1990s,” Mr Noé says. “But this also gives the chance to make more money.

“No-one is genius enough to pick the exact bottom but it doesn’t matter if you miss the last few per cent. We are in for five years not six months.”

Nick Criticos, chief executive of the new business, which is 70 per cent owned by F&C, says there are plans for a range of new funds, including an Indian affordable housing vehicle, a European property fund and a UK opportunity fund.

Aviva Investors sees similar opportunities. Alain Dromer, chief executive, says Aviva is the number one player in real estate in the UK, ranks second in Europe and has ambitions to become one of the world’s biggest real estate fund managers.

“Property is a long-term asset and there is demand for global property products,” he says.

“The asset class will remain attractive despite the credit turmoil. That is why we acquired Madison Harbour, a global property company, in April. We believe the asset class, beyond the present difficulties, will remain attractive, providing income and capital returns in the long term.”

Meanwhile, the acquisition of Goodman Property makes Aberdeen the second biggest property manager in the UK. Martin Gilbert, chief executive, says it is a reasonable time to buy a property business given the investment rationale for investing in real estate – stable incomes and relatively low volatility. Real estate is part of the range of alternative assets to mainstream equities and bonds for which there will be continued long-term investor appetite.

Bill Hughes, recently appointed managing director of real estate at Legal & General, is also now preparing for the next leg of the market, including potential new funds outside the core portfolio of UK property.

“We want to be underweight now but move to overweight to real estate nearer the bottom. It is a big call when you decide to turn cash to property.”

He says European markets will become attractively priced on a selective basis, but he adds that equity raising is still difficult.

Mr Criticos of F&C Reit agrees: “It is extremely difficult to raise new funds in the UK at the moment. Investors prefer to play a waiting game.” Indeed, property funds are seeing a pick up in net outflows, albeit nowhere near the same level as last year, when many managers were forced to sell properties quickly to pay a flood of departing investors.

Investment outflows from UK property funds rose sharply in July and August, according to the Investment Management Association, to a total net disinvestment of £124m, up from £46.8m in June. There were net retail investor outflows of £76m in July and £42.4m in August, a reversal of the inflows of £57.9m in May and £71m in April.

Certain institutional funds still have a block on redemptions, while Schroders imposed a price cut of up to 25 per cent on departing investors in its main institutional property fund in September.

Redemption issues are no longer an emergency for most, however.

William Hill, head of real estate at Schroders, says: “We see no indication that investors are abandoning the asset class. Indeed, the market setback is providing an opportunity for many funds that have limited property exposure to get into the market.”

The key change, he says, is that global mandates are now more popular as investors seek to diversify. Schroders has five new funds raising £1bn for the UK, Italy, Europe and Asia.

Although the consensus forecast is that the market will continue to struggle for at least another 18 months waiting for the banking sector to stage its own recovery, those that call the bottom of the market correctly will benefit hugely.

Funds may be timing it right this time.