Written by Rogier Quirijns, Head of European Real Estate at Cohen & Steers
After repeated suspensions and dismal performance from many open-ended direct property funds, UK investors may benefit from warming up to the potential of better returns, risk diversification and liquidity with real estate securities.
The beatings continue for direct property fund investors
As the pandemic abates, UK real estate investors are finally getting some relief after being trapped in open-ended direct property funds for more than a year. Back in March 2020, these funds were forced to suspend trading on £11 billion in UK customer assets due to their inability to accurately price and trade their property holdings. Now, after months of raising cash and selling assets at depressed prices, these funds are reopening the gates.
This should come as a surprise to no one. Time and again, periods of economic turmoil have exposed the structural flaw of offering the illusory promise of daily liquidity in funds that own illiquid assets. Worse yet, many of these funds have struggled to deliver returns above inflation, with Morningstar’s EAA Fund Property – Direct UK category providing a median real return of just 1.9% over the past decade, or 3.6% in nominal terms (Exhibit 1).
Many investors appear to have had enough, leading to an exodus of capital from direct property funds despite the prospect of a recovery in real estate fundamentals. However, investors need not abandon the asset class. Based on the data, a better real estate solution is in front of them.
Funds that invest in real estate investment trusts (REITs) and other real estate securities offer potential advantages across three key areas: a) significantly stronger historical returns, b) the ability to diversify risk across many sectors and geographies, and c) daily liquidity in the underlying assets, which has allowed REIT funds to remain fully open for trading even in times of severe economic stress. It’s a solution we believe UK investors can no longer afford to ignore.